U.S. GOVERNMENT PRINTING OFFICE

62–971CC WASHINGTON : 2000

SENIORS’ ACCESS TO AFFORDABLE PRESCRIPTION

DRUGS: MODELS FOR REFORM

HEARING

BEFORE THE

SUBCOMMITTEE ON

HEALTH AND ENVIRONMENT

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

FEBRUARY 16, 2000

Serial No. 106–92

Printed for the use of the Committee on Commerce

(

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON HEALTH AND ENVIRONMENT

MICHAEL BILIRAKIS, Florida, Chairman

FRED UPTON, Michigan

CLIFF STEARNS, Florida

JAMES C. GREENWOOD, Pennsylvania

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

Vice Chairman

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

ED BRYANT, Tennessee

TOM BLILEY, Virginia,

(Ex Officio)

SHERROD BROWN, Ohio

HENRY A. WAXMAN, California

FRANK PALLONE, Jr., New Jersey

PETER DEUTSCH, Florida

BART STUPAK, Michigan

GENE GREEN, Texas

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

LOIS CAPPS, California

RALPH M. HALL, Texas

EDOLPHUS TOWNS, New York

ANNA G. ESHOO, California

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

2

C O N T E N T S

Page

Testimony of:

Alecxih, Lisa Marie B., Vice President, The Lewin Group ........................... 134

Braun, Beatrice, Member, Board of Directors, AARP ................................... 26

Lewis, Rita H., Director, Osteoporosis Support Group of San Diego, California .............................................................................................................. 24

McCall, Carol J., Executive Vice President, Managed Care, Allscripts ....... 144

Moran, Donald W., President, The Moran Company .................................... 141

Scanlon, William J., Director, Health Financing and Public Health Issues,

General Accounting Office ............................................................................ 100

Vladeck, Bruce C., Director, Institute for Medicare Practice, Mount Sinai

School of Medicine, and Senior Vice President for Policy, Mount Sinai

NYU Health ................................................................................................... 127

Washington, Bonnie, Director, Office of Legislation, Health Care Financing Administration, accompanied by Jack Hoadley, Director, Division

of Health Financing Policy ........................................................................... 94

Young, Donald, Chief Operating Officer and Medical Director, Health

Insurance Association of America ................................................................ 148

(III)

(1)

SENIORS’ ACCESS TO AFFORDABLE PRESCRIPTION DRUGS: MODELS FOR REFORM

WEDNESDAY, FEBRUARY 16, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON HEALTH AND ENVIRONMENT,

Washington, DC.

The subcommittee met, pursuant to notice, at 10:24 a.m., in room

2322, Rayburn House Office Building, Hon. Michael Bilirakis

(chairman) presiding.

Members present: Representatives Bilirakis, Upton, Greenwood,

Burr, Bilbray, Ganske, Norwood, Coburn, Lazio, Cubin, Pickering,

Bryant, Waxman, Pallone, Deutsch, Stupak, Green, Strickland,

DeGette, Barrett, Hall, Eshoo, and Dingell (ex officio).

Staff present: Carrie Gavora, majority professional staff; Tom

Giles, majority counsel; John Manthei, majority counsel; Kristi

Gillis, legislative clerk; Bridgett Taylor, minority professional staff;

and Amy Droskoski, minority professional staff.

Mr. BILIRAKIS. The hearing will come to order. The Chair wishes

to announce that, with the exception of the chairman’s and ranking

member’s opening statement, the others will be limited to 3 minutes in the interest of time. We have a long hearing scheduled.

I now call to order this hearing on Seniors’ Access to Affordable

Prescription Drugs: Models for Reform. Today’s hearing will provide an opportunity to delve deeper into the details of specific proposals to expand prescription drug coverage for Medicare beneficiaries. I believe every hearing is an opportunity for members to

educate themselves, and the issue of prescription drug coverage

certainly merits our time and attention.

However, I feel strongly that we must act soon to advance legislation that can be enacted this year. As I have repeatedly said, I

believe no beneficiary should have to choose between filling a prescription and buying groceries. At a minimum, we must take action

to help individuals in greatest need today.

As you know, I have introduced a bipartisan plan to improve prescription drug coverage for the poorest and sickest Medicare beneficiaries. The bill is not perfect, and I would not try to force this

approach on any other member. After reviewing all of the proposals

before us, however, I hope that we can reach a consensus this year

on some plan to improve prescription drug coverage for Medicare

beneficiaries particularly those in need.

I am proud of the subcommittee’s record of success in addressing

difficult legislative issues on a bipartisan basis. And, given the

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charged political climate and the complexity of the prescription

drug debate, the challenge before us is most certainly daunting.

As we seek common ground, I noted with interest a provision in the President’s budget proposal to set aside $35 billion in on-budget

surplus money over 10 years for a policy that provides protections

against catastrophic drug costs. In a similar vein, the bipartisan

bill that I have introduced would establish a stop-loss protection for

beneficiaries who have high annual drug costs. I hope this is an

area where we can find agreement, and I look forward to hearing

more about the administration’s plans in this regard.

Our first panel of witnesses will describe the perspective of senior citizens in this debate, and it includes a fellow Floridian, Dr.

Beatrice Braun. Our second panel includes representatives from

the Health Care Financing Administration and the General Accounting office, and our final panel includes several distinguished

experts with a diverse range of experience in addressing these

issues. I want to welcome each of our witnesses and thank them

for taking the time to join us. I look forward to today’s hearing and

the opportunity to work together to advance legislation to help

beneficiaries obtain the medicines they need.

The Chair now recognizes Mr. Waxman.

Mr. WAXMAN. Thank you very much, Mr. Chairman.

This Congress needs to take action to provide prescription drug

benefits under Medicare. We need to act to eliminate price discrimination for drugs for our seniors. These two simple actions are

long overdue, and I hope today’s hearing marks the first real step

toward dealing with these needs.

Sherrod Brown, who has been committed to securing a universal

prescription drug benefit in Medicare, normally would be here

today in his position as ranking member on this subcommittee, but

he is in Ohio suffering from injuries from a serious automobile accident. I know we all wish him a speedy and full recovery, and I

know he is anxious to be back and help pass prescription drugs legislation out of this committee.

No one would design Medicare today without including a prescription drug benefit. It is as critical to good medical care today

as hospital care or physician care was when Medicare was first enacted. The simple fact is that if people can’t get the drugs they

need, they don’t have adequate health care coverage.

We know that over one-third of Medicare beneficiaries have no

drug coverage, and nearly 30 percent more have unreliable or very

inadequate coverage. That is almost two-thirds that need help. Retiree coverage is shrinking or being eliminated, benefits are increasingly expensive and inadequate, and we know that all the

trends show that this situation is only going to get worse.

Further, we know that seniors out there trying to purchase their

prescription drugs on their own face tremendous price discrimination. They pay more for their drugs, frequently twice as much or

even more for their drugs than the government or other favored

customers of the drug companies. They are at the stage of their

lives when they have more health problems and chronic illnesses.

They need and use drugs more than any other part of the population, and yet they have the hardest time getting coverage, and

when they purchase out of pocket, they pay the highest prices.

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Medigap coverage is no answer. Any policy with drug coverage

becomes an extremely expensive policy. Not only is the drug coverage itself expensive, but the adverse selection that occurs runs up

the costs overall. So people pay very high premiums that not uncommonly are barely equivalent to the amount of drug coverage

that the policy supposedly provides. In some cases, seniors find

they are paying more in increased premiums than the drug coverage is worth.

And this isn’t simply a problem for the low income. More than

half of current Medicare beneficiaries without drug coverage have

incomes above 150 percent of poverty. If you are a widow living on

Social Security, if you have several different chronic conditions, if

you need prescriptions regularly, you can’t afford your drugs. It is

that simple.

All this clearly underlines the need for Medicare coverage of prescription drugs for all of the program’s beneficiaries. We wouldn’t

pay for hospital care only for the poor. We shouldn’t think of limiting drug coverage in that way, either.

To me, the crisis that faces Medicare today is not its solvency.

We know that the Trust Fund is solvent for at least 15 more years.

The crisis in Medicare is that it doesn’t provide coverage for prescription drugs when that coverage is so obviously needed.

Do we need to work long term to adjust Medicare and its financing so that we are ready to care for the baby boomers? Of course

we do. But this is a program that is too vital for too many to take

hasty or ill-considered actions that are neither well understood or

supported by the public. More fundamental changes are a long

term project.

But however we change the program in the future, we know that

it will have to provide prescription drugs if it is going to meet the

health care needs of our seniors and disabled citizens. It will never

be easier or cheaper to do than it is now. Let’s get on with providing coverage in the program and ending price discrimination for

seniors. I hope our witnesses today will help us take the steps to

achieve these goals this year. This Congress could have no better

legacy.

Thank you, Mr. Chairman.

Mr. BILIRAKIS. Mr. Greenwood?

Mr. GREENWOOD. Thank you, Mr. Chairman.

As Mr. Waxman has just said, we are in a crisis. We have wasted

a lot of time trying to resolve this crisis. There has never been a

prescription drug benefit for Medicare. We had an opportunity

about a year ago, when the bipartisan Breaux-Thomas Commission

made recommendations that would have enabled us to structurally

reform Medicare in a way that would have made it quite convenient to add the prescription drug benefit, and unfortunately it was

the administration that decided to sink that bipartisan agreement.

So here we are today in a position where, as we know and it has

been said, 35 percent at least of America’s seniors do not have access to prescription drug benefits at all. And in this day and age,

if you don’t have access to the new marvels of the pharmaceutical

industry and the new marvels of the biological industry, you don’t

have good health care.

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As we look at this problem today, one of the things that we

should focus on is illustrated by the first chart, which has just been

covered up by the second chart. Now, the first chart indicates that

the place we need to focus our attention, obviously, is on the lowest

income, the 35 percent of seniors without prescription drug coverage. If you look at the far right, only 5 percent of the wealthiest

American retirees, 5 percent of those over $50,000 per year of income are without the benefit, and that escalates as you go, in inverse proportion to income, as you go down to those below $10,000

where you have 37 percent of the seniors without the benefit.

This will get worse. Actually, that is—okay, that will do. This

problem is going to get worse for several reasons. No. 1, as we all

know, the percentage of those of us who will be above the age of

65 by 2030 will go from 13 percent last year to 20 percent, and the

reliance on medication, for a lot of very good reasons and to the

benefit of the retirees, will go from 33 percent of the population of

retirees using medication of some kind to 51 percent on a regular

basis.

Another reason why this crisis will worsen if we don’t resolve it

soon is because the costs of pharmaceuticals in total are increasing

rapidly in comparison to a generally declining Consumer Price

Index. If you look at 1993, the average increase in pharmaceuticals

was about 8.2 percent that year against a 2 percent CPI. And while

the CPI is still 2.7 percent in 1999, the increase, the 1-year increase in the cost of pharmaceuticals total was 18.5 percent, double

digits, and that trend is probably going to continue in that direction.

Finally, what is important I think to look at is that simple approaches, oversimplified approaches that would simply try to freeze

the prices of pharmaceuticals, won’t do the job because the annual

increase in the prices of pharmaceutical products on the market is

not the culprit. If you look at that chart, they increased 8.4 percent

in 1990. In 1998 there was only 3.2 percent. That is the purple portion of those bar graphs on the bottom. So the annual increase in

the price of products on the market is relatively de minimis.

What is happening is that the utilization, the volume mix, the

likelihood that the retiree is on one or more medications, is increasing, and the new products coming onto the market that have cost

a half a billion dollars——

Mr. BILIRAKIS. Would the gentleman finish up?

Mr. GREENWOOD. [continuing] is the major cause of the price, the

cost increase. So we should avoid simple approaches to this problem, but we should get on with it, and this side of the aisle is prepared to do that.

Thank you, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentleman.

The gentlelady from Colorado.

Ms. DEGETTE. Thank you, Mr. Chairman, and thank you for

holding this hearing on Medicare prescription drug coverage.

As we have heard already from my colleagues, our seniors are in

crisis over prescription drug issues. Almost two-thirds of them have

limited or no coverage whatsoever, and as we just heard, the issue

is not just one for coverage but also for addressing rising costs. In

fact, the average annual prescription drug costs for seniors are estiVerDate 11-MAY-2000 13:23 Jul 12, 2000 Jkt 064041 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 E:\HEARINGS\62971 pfrm07 PsN: 62971
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mated to increase from $942 in 1999 to $2,353 in 2011. For seniors,

who often live on a fixed income, they are at considerable risk to

such extraordinary cost inflation, and they desperately need a comprehensive Medicare prescription drug benefit.

Some people say we should just build on the current system.

However, access to prescription drugs cannot be just based on factors as where you happen to retire, as is so often the case today.

For example, just among the 14 to 15 percent of Medicare beneficiaries that are enrolled in HMOs, some Medicare+Choice HMOs

offer comprehensive coverage; others have adopted limited coverage

with, as Bruce Vladeck points out, a bewildering variety of formulary restrictions, benefit caps, and other techniques to try to

manage their pharmaceutical costs which significantly complicate

the process of choice for beneficiaries, and an increasing number of

plans are completely dropping drug coverage.

The options for the other 85 percent of Medicare beneficiaries are

further complicated by the perverse incentives of prescription drug

coverage in inpatient settings but lack of coverage in outpatient

settings, interactions with third party coverage and Medicaid.

All of this cries out for adoption of a standard Medicare pharmaceutical benefit that would significantly simplify the choice process.

Moreover, with a standard prescription drug benefit, as is the case

among private employers, the Medicaid program and the VA, Medicare could for the first time assist seniors with the spiraling costs

of prescription drugs by bargaining for volume discounts on their

behalf. Without it, according to a study I did of prescription drug

prices in my district, seniors are going to pay, at least in the First

Congressional District of Colorado, on average 121 percent more for

prescription drugs than favored customers like large insurers,

HMOs and the VA.

Mr. Chairman, to address both the lack of prescription drug coverage and rapidly rising costs, this Congress has the responsibility

to act this year, and I am glad that we all seem to recognize the

problem on a bipartisan basis. The devil is always in the details,

and I look forward, along with my colleagues, to hearing the testimony that we will hear today.

Thank you, and I yield back.

Mr. BILIRAKIS. I thank the gentlelady.

Dr. Coburn?

Mr. COBURN. Thank you, Mr. Chairman, for holding this hearing.

I think there are a couple of things that we need to talk about

when it comes to Medicare prescription drugs, and I do have the

experience of having my seniors decide over a pill versus a meal,

and I also know that about one out of every three prescriptions I

write them, they don’t fill because they don’t have the money to do

it.

As we look at this, you know, everybody says we are in surplus,

but it is important to keep in mind that the surplus last year, the

$1 billion true surplus, came out of the Medicare Part A Trust

Fund. The $23 billion that is projected for surplus for this year is

coming out of the Medicare Part A Trust Fund. It is excess payments into Medicare. The $22 billion for the year 2001 is coming

from the Medicare Part A Trust Fund.

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So, as we look at the integrity of the Medicare system, it is important that we understand that the projections that Mr. Waxman

gave that it will be fine for 15 years, it is not going to be fine for

15 years, because we are going to spend the money, and the money

is going to get spent on other things. So the first thing we need

to do, if we are going to establish a drug program for Medicare, is

to stop taking Medicare Part A Trust Fund money.

The second thing that I think we need to do is to look at what

the real problems are in the drug industry. One of the greatest

mistakes this Congress did was give drug companies the right to

advertise on television. If you look at the 18.5 percent increase in

the cost of drugs for 1999, ask how much that would have been decreased if $5 billion hadn’t been spent on television advertising for

drugs that are prescription anyway. Last week an associate of mine

saw a television ad for an IV antibiotic, on television.

Now, who is paying the price for that? Who is paying for that?

Medicare seniors are paying the price because we have decided to

allow drug companies to advertise prescription drugs on TV, of

which half the doctors, when they get asked to do that, immediately give something other than that because they are so abhorrent that the TV should be telling a patient what they need when

they don’t give full information on it.

The second thing that I think needs to be looked at is the lack

of competition in the drug industry. There is no competition in the

drug industry. We like to say there is, but there is not.

No. 3 is the fact that the American consumer is subsidizing

drugs in Canada and Mexico, that if you look at the prices and we

ignore the NAFTA system for allowing drugs to move across borders, in fact we are subsidizing drugs to a great extent throughout

the country.

The fourth thing that I think needs to be looked at is the lack

of utilization of appropriate generics, and the failure of the FDA

and the administration to approve an increasing number of generic

drugs, and the failure of the medical profession to utilize generic

drugs in their efforts to try to lower the costs. Real care of patients

is determined on whether or not you identify what is wrong with

them, give them something that they are going to use, that will in

fact impact. If you give somebody a prescription that costs $100

and they can’t fill it, you haven’t helped them at all.

Mr. BILIRAKIS. Please summarize.

Mr. COBURN. I will. So what should be the things that we look

at as we look for prescription drug relief? Prolong the life of Medicare, that is the first thing we ought to do. The second thing we

ought to do is make sure whatever we do increases competition.

No. 3, the third thing is increase access. And the fourth thing,

what can we do to lower costs?

And I thank the chairman.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Burr, to inquire? Do you have an opening statement?

Mr. BURR. Thank you, Mr. Chairman.

So many numbers, so many differences in the numbers. Here is

one number that I don’t think anybody will dispute: $11,727 is the

income of an individual at 150 percent of poverty in the United

States of America. The question you have to ask yourself is, how

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long will we allow that individual to make a decision as it relates

to where that $11,000 is spent, and for us, the safety net, not to

provide the drug access and availability for them.

I don’t think that the argument in this committee will be over

whether there is a need for the Federal Government to be involved.

Until Mr. Dingell came in, I could safely say nobody on the committee was here when we passed Medicare into law. But clearly,

had drug benefits been part of the standard policy at that time, I

think that prescription drugs would have been part of Medicare

and should be today.

The GAO will testify shortly that it should be done in conjunction with comprehensive reform of Medicare. You have already

heard some members say we don’t need to do that now. One of the

reasons that we are in this position is that we haven’t been bold

enough to tackle tough things in the past as it relates to health

care, and especially as it relates to seniors’ health care.

I personally believe that it is time that they have the best delivery system for health care, and that is not our current Medicare

system. But we can add the drug benefit in the right way, a way

that makes it comprehensive and universal so that all seniors can

have an option of buying in and some seniors being supplied the

subsidy, and it fits in the model of where we go for Medicare in

the future, then I am all for doing it with this very important first

step.

Mr. Chairman, I look forward to the witnesses. I thank them for

their testimony in advance. I look forward to this committee producing a product that some in this town say we can’t do, and in

fact this Congress passing it and this President signing it into law.

I yield back.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Dingell, to inquire?

Mr. DINGELL. Mr. Chairman, thank you. First, I commend you

for the hearing today. Second of all, I observe this is a most important subject and one on which we should provide leadership, and

again I commend you.

I ask unanimous consent that my full statement be inserted into

the record, and I be permitted to summarize.

Mr. BILIRAKIS. Without objection, the opening statement of all

members of the panel will be made a part of the record.

Mr. DINGELL. Mr. Chairman, one of the great needs of Medicare,

which was originally introduced by my dad, and which I sat in the

chair when it was passed, is to see that we give our senior citizens

coverage for prescription drugs, because many of them are compelled to go to a doctor, to receive the friendly bedside manner, but

not to receive the thing which is absolutely essential to the success

of the treatment, and that is prescription pharmaceuticals to address the basic medical need which they confront.

More and more costs are being asserted against them. Medicare

beneficiaries have only limited coverage for insurance against the

costs of prescription pharmaceuticals, and indeed many of them are

suffering significant difficulties, including hard choices between

prescription pharmaceuticals which they need and, unfortunately,

food, lodging and other things which happen to be equally important to them.

8

The inclusion of prescription drugs in the Medicare program does

not have to wait for system-wide reform. It can be dealt with

through incremental change, and if you have observed the difficulties that we always confront when you try to make a massive,

sweeping change, the end result is, nothing happens. My suggestion is that we then get down to the business of addressing this

problem in a simple, easy change which we can make which will

achieve broad support, and which is really not subject to any criticism.

There are two discharge petitions now pending, one on the Allen

bill, H.R. 664, and one on the Stark-Dingell bill, H.R. 1495. The

Allen bill will provide access to prescription drugs at discounted

prices for seniors, making them more affordable. I will note that

not infrequently drugs of the same exact chemical prescription or

substance are made available to animals at about half the cost to

which they are made available to senior citizens. Clearly there is

some imbalance here that needs to be addressed, and I would suggest that we can and should do so at an early time. The Stark-Dingell bill would add a universal affordable prescription drug benefit

to the Medicare program.

The petitions will seek to have an open rule so that we can full

and fair consideration of the bills on the House floor. I prefer to

follow, of course, the regular order, and it is for that reason I am

delighted, Mr. Chairman, that you are having this hearing, because

this enables us then to commence moving forward on both of these

pieces of legislation and not to confront the kind of problem that

the committee and the Congress confronted when we had to move

the Patients’ Bill of Rights, which was so ably sponsored by my

dear friend, Mr. Norwood, with my modest assistance.

Mr. BILIRAKIS. If you would summarize, please.

Mr. DINGELL. Having made that observation, I look forward to a

successful consideration of this matter, a harmonious and bipartisan working together to achieve a solution to a problem which the

senior citizens find most troublesome. And I would note simply to

the committee, the people want it, the country needs it, it is good

for us all to resolve this question, we can do so easily, and I am

delighted to see you embarked upon the beginning of this undertaking. And I know that the committee, under your leadership, will

move forward, and I look forward to being a modest participant.

[The prepared statement of Hon. John D. Dingell follows:]

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Medicare is one of the most successful social programs of our time. In 1965, when

Medicare was created, about half of America’s seniors did not have health insurance. Almost 1 in 3 seniors lived in poverty, and were forced to choose between food,

rent, or needed care.

Today, as a result of Medicare, seniors can get affordable health care. The poverty

rate of the elderly has been cut in half. Americans are living longer and more prosperous lives.

However, since the program’s enactment, there have been many advances in medicine. Most notably, prescription medications have been a critically important form

of treatment, helping to cure disease, to prevent relapse of illness or injury, and to

prevent the onset of disease or disability.

But, most seniors find themselves paying more and more out of pocket for the

drugs they need to stay well. Some Medicare beneficiaries have insurance coverage

to help with these costs, but this coverage is unstable and declining. Medicare beneVerDate 11-MAY-2000 13:23 Jul 12, 2000 Jkt 064041 PO 00000 Frm 00012 Fmt 6633 Sfmt 6621 E:\HEARINGS\62971 pfrm07 PsN: 62971
9

ficiaries today face problems with drug coverage similar to the health insurance coverage problems faced in 1965. Many are presented with a stark choice between food,

rent, or prescription drugs. And of those with coverage, about half are without fullyear coverage.

To fulfill the promises made to seniors in 1965, we need to modernize the Medicare benefits package and make prescription drugs an integral part of Medicare.

What this means is that prescription drugs should be available to all Medicare beneficiaries through the Medicare program, whether in fee-for-service or managed care.

The benefit should be defined so that all Medicare beneficiaries are guaranteed dependable coverage, no matter where they live or how they get their coverage. Additionally, the benefit should be structured to encourage participation, and it should

have protections for the low-income beneficiaries. Recognizing the important role

that employers play in providing retiree benefits, we should also encourage employers to continue providing these benefits as well.

However, the inclusion of prescription drugs in the Medicare program should not

have to wait for system-wide reform. We do need to explore ways that the Medicare

program can be modernized and encouraged to work more efficiently, but given the

number of people affected by system-wide reform, we should proceed with caution,

and certainly accept no proposal that would eliminate the universal guarantee and

social insurance nature of the Medicare program. We should be seeking to fulfill the

promises made to seniors in 1965, not break them.

We are eager to get down to the business of providing prescription drug coverage

in Medicare and making needed medicines more affordable for seniors this year.

Today, we Democrats introduced two discharge petitions: one on the Allen Bill, H.R.

664, and one on the Stark-Dingell bill, H.R. 1495. The Allen bill would provide access to prescription drugs at discounted prices for seniors, making them more affordable. The Stark-Dingell bill would add a universal, affordable prescription drug benefit to the Medicare program. These petitions seek to discharge an open rule, so that

we can have full and fair consideration of these bills on the House floor. While I

prefer to follow regular order, both of these bills were introduced almost a year ago,

but we have not seen any action to date. Seniors have already been waiting too long

for help.

I am pleased to see that this Committee is exploring the issues surrounding providing prescription drug coverage in Medicare. I look forward to hearing from today’s witnesses, and I hope that we will expeditiously proceed to markup on a proposal that would guarantee all Medicare beneficiaries affordable, accessible, and

comprehensive coverage of prescription drugs. But if this Committee fails to act,

each Member can do his or her part by signing the discharge petitions so that seniors are not kept waiting.

Mr. BILIRAKIS. And I thank the gentleman.

Mr. Bryant?

Mr. BRYANT. Thank you, Mr. Chairman.

Access to prescription drugs for Medicare beneficiaries is probably the most critical issue facing lawmakers this year. The current

Medicare benefit package does not cover most prescription drugs,

and I have heard from many seniors in my district who struggle

to afford their medicines every month.

Today none of us would devise a medical insurance program for

seniors that didn’t include coverage for prescription drugs, but the

current Medicare program was created in 1965, and back then

drugs didn’t play as vital a role in keeping people healthy. A lot

has changed in health care since then. Conditions which used to require hospitalization can now be treated with new medications.

These modern medicines help keep people out of the hospital, out

of nursing homes, and help people remain active, productive members of society.

Over the past 35 years medicine has changed, but Medicare has

not been able to keep up with those innovations because of the way

it is designed and its overwhelming complexity. The program continues to be plagued by financial problems. Frankly, we owe beneficiaries a better Medicare, one that can adapt and adjust to

changes in the health care system. We should not lose sight of the

10

long term goal as we work to provide new, affordable options for

prescription drug coverage for seniors.

I want all beneficiaries to have access to affordable prescription

drugs. I am interested to hear from our witnesses today on how

they think they can provide better access. I know someone is here

from HCFA to talk about the administration’s plan, and I am glad,

because I have concerns about that proposal. To be honest, after

looking at the President’s numbers, I am not sure many seniors

will get much of a benefit from his plan.

For example, the average senior without any form of drug coverage is paying approximately $468 in total drug costs annually,

according to the latest data from the Medicare current beneficiaries

survey from HCFA. Under the administration’s plan, a beneficiary

would pay $302 a year in premium expenses and half the cost of

the prescriptions that they purchase, so $302, plus half of the $465

on average is $234, equals about $536 total that a person would

pay under the President’s plan. This senior would be paying $68

more under his plan.

I may be crazy here, but I think we can probably do better than

that. These are the facts and the figures that we have to look at

closely today, and I am confident that we can find a better marketbased solution that will help the seniors than the President has

suggested so far.

I want to thank the witnesses today in advance who have taken

their time to be here, and I look forward to your testimony. Mr.

Chairman, I yield back the balance of my time.

Mr. BILIRAKIS. And I thank the gentleman for that.

Mr. Pallone?

Mr. PALLONE. Thank you, Mr. Chairman, and I want to thank

you for holding this hearing.

The lack of an affordable prescription drug benefit is, without

question, the biggest problem with the Medicare program today.

The problem can’t be corrected piecemeal by simply devising a plan

to cover the poorest seniors. A comprehensive, affordable drug benefit should be available to all seniors regardless of income. Over 50

percent of Medicare beneficiaries without drug coverage are actually middle class seniors.

It is not clear to me whether the Republican leadership is prepared to move away from their previous plan to cover only the onethird of Medicare beneficiaries who lack any prescription drug coverage at all. The Speaker, I understand, has appointed a partisan

task force to study this issue, and I hope this is not a mere diversionary tactic to stall any action by this committee to move quickly

on a comprehensive drug benefit that includes putting an end to

the price discrimination seniors face when purchasing pharmaceuticals.

That price discrimination issue has been well documented by Mr.

Waxman and his Government Reform Committee and a number of

consumer groups. The Waxman committee report shows that seniors pay almost twice as much for their prescription drugs than do

the pharmaceutical industry’s most favored customers. Families,

U.S.A., to cite just one example from outside the government, found

that the prices of the 50 drugs used most frequently by seniors

11

have risen at approximately two times the rate of inflation over the

past 5 years, and four times the rate of inflation over the last year.

When it comes to an examination of who has taken the lead in

trying to fix this problem, I think the record is clear. Notwithstanding Chairman Bilirakis’ bill, the Republicans have done little

on this issue. Democrats, on the other hand, have been on the

House floor day after day since the 106th Congress began, pushing

for consideration of legislative solutions such as those that have

been offered by Congressman Tom Allen and Mr. Waxman and by

Congressman Pete Stark and Mr. Dingell. All day today, in fact,

Democrats will be signing discharge petitions on both of these bills

in an effort to overcome the GOP’s opposition to moving this issue

forward quickly.

Both the Stark and Allen plans would increase the negotiating

power of those seeking to provide a Medicare drug benefit, allowing

pharmaceuticals to be purchased at cheaper prices and passing

those savings on to all interested seniors. The President’s plan also

proposes to establish a comprehensive benefit and provide pharmaceuticals to seniors who need them at discounted prices, and I

strongly support his proposal. On the other hand, I don’t know of

any Republican proposals or expressions of support for confronting

the issue of pharmaceutical price discrimination.

Mr. Chairman, before closing, I did want to express my view that

I do think it is important to bring in the pharmaceutical companies

in our efforts to pass the Medicare prescription drug benefit. The

willingness of the drug companies to drop their initial opposition

to a benefit, and specifically to the President’s proposal, is refreshing. I was contacted by some of New Jersey’s pharmaceutical executives in particular last month, who expressed their willingness

to sit down and help come up with a plan.

In an effort to show bipartisanship and support for a plan that

the industry did not oppose, I, along with my colleague from New

Jersey, Marge Roukema, sponsored the House version of the SPICE

Act last year, and I believe——

Mr. BILIRAKIS. Please summarize.

Mr. PALLONE. [continuing] and I believe that that also can move

the prescription drug benefit debate forward.

Thank you, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentleman.

Dr. Norwood?

Mr. NORWOOD. Thank you very much, Mr. Chairman.

This is of course a very important hearing, but just on a little

lighter note, I want to say to my dear friend John Dingell, who can

be described in many wonderful ways, ‘‘modest’’ is probably not one

of the words that should be in his vocabulary.

We need to begin this process of matching a real and correct legislative solution to the rhetorical problem that dominates the political arena, and we are not going to get there, my friend Mr.

Pallone, by making this a partisan issue, and you know that. My

observation is that if you want to be real partisan, that is a certain

way of how not to get the job done.

The question is, how do we increase seniors’ access to affordable

prescription drugs? I would like to begin by noting a very simple

truth, a fact: The long term health of the Medicare program is far

12

from settled. When we first took up Medicare reform at least 5

years ago, bankruptcy was imminent, in fact this year. In 1997 we

made some very hard choices in changing the way we reimburse

providers, and it did extend the solvency of Medicare 15 years.

In fact, we did go too far, which is why we had to pass a bill

making some technical refinements last year, and I am proud we

recognized we went too far and made the correction. But we all

know the problems in Medicare are far from being solved. I am

sure we have all been visited by our hospitals. They are far from

comfortable with their Medicare reimbursement, for example.

Medicare needs a long term solution, and we should be spending

more talking about ways to make fundamental changes to make

Medicare solvent for our children and our grandchildren. Yet, here

we are talking about adding a massive, costly new benefit to Medicare.

Now, I am not trying to argue that the cost of prescription drugs

for seniors is not a very, very real issue. It is a very real issue for

those seniors who have no drug coverage, I can tell you that. The

question for me is, should we be trying to create a new drug benefit

for all seniors, or should we be trying to find a way to get help in

purchasing prescription drugs to those seniors who actually need

the help? I like Mr. Perot, but I am not interested in helping him

with his drugs, for example.

Mr. Chairman, the President’s proposal is unacceptable to me. It

is like using a backhoe to weed your garden. When the long term

solvency of Medicare is in question, adding $168 billion in a government-run universal benefit just doesn’t quite make sense to me.

It is like trying to solve the problem of a company going bankrupt,

and the solution, the CEO says, is ‘‘Let’s go see how much more

money we can spend. Maybe that will solve the problem.’’ I believe

that when we fully examine the consequences of such a proposal,

it could have on the pharmaceutical market, for example, and we

had better examine that——

Mr. BILIRAKIS. Please summarize.

Mr. NORWOOD. [continuing] particularly in their research, we will

probably reject the President’s proposal.

Mr. Chairman, I would like to add my remaining remarks to the

record, and simply say I would like to associate my final comments

with Dr. Coburn. I think he is exactly correct when we talk about

the use of generic drugs. That is an important part of the solution.

I think he is precisely correct when he said——

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. NORWOOD. [continuing] we made a mistake allowing the

drug, the pharmaceutical companies, to advertise on TV, and I

hope we will deal with that. And that is all, Mr. Chairman.

[The prepared statement of Hon. Charlie Norwood follows:]

PREPARED STATEMENT OF HON. CHARLIE NORWOOD, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF GEORGIA

Thank you, Mr. Chairman. This is a very important hearing today, because we

need to begin the process of matching a real legislative solution to the rhetorical

problem that dominates the political arena. How do we increase seniors’ access to

affordable prescription drugs?

I would like to begin by noting a very simple fact—the long-term health of the

Medicare program is far from settled. When we first took up Medicare reform five

years ago, bankruptcy was imminent. In 1997, we made some very hard choices in

13

changing the way we reimburse providers and extended the solvency of Medicare

for 15 years. In fact, we probably went too far in some areas—which is why we had

to pass a bill making some technical refinements last year.

But we all know the problems in Medicare are far from solved. I am sure we have

all been visited by our hospitals. They are far from comfortable with their Medicare

reimbursement. Medicare needs a long-term solution, and we should be spending

more time talking about ways to make fundamental changes to make Medicare solvent for my children and grandchildren.

Yet here we are talking about adding a massive, costly new benefit to Medicare.

I am not trying to argue that the cost of prescription drugs for seniors is not a real

issue. It is a very real issue for those seniors who have no drug coverage whatsoever. The question for me is... should we be trying to create a new drug benefit for

all seniors or should we be trying to find a way to get help in purchasing prescription drugs to those seniors who need help?

Mr. Chairman, the President’s proposal is unacceptable. It is like using a backhoe

to weed your garden. When the long-term solvency of Medicare is in question, adding a 168 billion dollar, government-run, universal benefit just doesn’t make sense.

I believe that when we fully examine the consequences such a proposal would have

on the pharmaceutical market—particularly in the area of research—we will reject

the President’s proposal.

Mr. Chairman, I believe we need to focus on the real problem through a targeted

approach. We need to be looking at solutions that benefit those who have no drug

benefit and need help to afford the cost of prescription drugs. We need to be careful

not to do anything that might negatively affect pharmaceutical research. We need

to be careful not to do anything that might make the job of long-term Medicare reform more difficult.

If we can find a common ground between us on what is necessary to help seniors

in need, we can pass useful legislation. If we are going to turn this into a political

football, then we are wasting our time and not doing seniors any good. Mr. Chairman, I look forward to working with you to make a difference for seniors in need.

Mr. BILIRAKIS. The gentleman from Michigan.

Mr. STUPAK. Thank you, Mr. Chairman. I apologize for being a

little bit late because I was down in line signing the discharge petitions. I think they are critically important. I think we have to do

them. Since 1998 I have been on the Stark-Waxman bill—excuse

me, Stark-Dingell bill and the Allen-Waxman bill. And, you know,

the discharge petitions just say let’s have a full, honest, open debate on this issue. But I am pleased that at least the debate can

start here, Mr. Chairman, and I thank you for holding a hearing.

You know, like I said, it has been 2 years, 1998, since we brought

forth those bills. In those 2 years, what I have found is, seniors

across my district, like the 88-year-old widow up in Sheboygan,

Michigan, whose only income is $814 from Social Security. Her

monthly prescription drugs are $446. Fifty-four percent of her income goes just to try to pay for her prescription drug coverage. And

no matter where I go in my district, from Lawrence to Traverse

City to Ironwood, seniors are spending anywhere from 25 percent

to 50 percent of their income just for their prescription drugs, and

we have examples of letters that go on and on. And then you see

reports where, if you are a veterinarian, you get the same medicine

for your animal for half the costs that seniors are paying. There is

something wrong with it.

So, while we are not trying to politicize the issue, we are certainly going to get the political pressure up here to get this issue

before us. A drug benefit is very, very necessary.

I noticed over the break that the drug companies were running

these ads about accessibility to drugs. It is not accessibility. It is

called affordability. How can you have seniors who have prescription drug coverage pay 50 percent less than a senior who is standing in line at the pharmaceutical companies, I mean at the drug

14

store, paying half of what they have to pay just because they don’t

have any kind of drug benefit coverage?

So I think we should move these bills, being the Allen bill and

the Stark bill, and I hope we would do it quickly. There is no excuse for it. I think what we should strive for in these hearings is,

how can we provide universal prescription drug coverage for everybody, under Medicare or any other kind of program you want to advise, and also to end the drug price discrimination by the pharmaceutical industry, not only amongst our seniors, but when you are

dealing with animals and seniors.

And I live on the Canadian border. We can go across to Canada,

the same drug, the same everything, half to 60 percent less of what

you would pay in the United States, and they are all manufactured

here in the United States. No reason for it, Mr. Chairman.

So I look forward to this hearing. Thank you for having it. I yield

back the balance of my time.

Mr. BILIRAKIS. I thank the gentleman.

Dr. Ganske?

Mr. GANSKE. Thank you, Mr. Chairman.

I think it is true that there are some Medicare beneficiaries, for

instance widows who exist solely on their Social Security, and out

of that Social Security is taken Medicare premiums, and they are

faced with the situation where on some months they have to decide

between different types of medications that they can have refilled,

or even between medications and other essentials of life such as

heating and food. So I think there is no question that we should

do something, especially to target the neediest of Medicare beneficiaries, in regards to the high cost of prescription drugs.

You know, Mr. Chairman, Congress has dealt with this issue before, and I think it would behoove every Member of Congress, not

just this committee, to go back over what Congress did in 1988 and

look at this issue. Now, I know there are some members on the

panel here who were here at that time, but CRS has a report for

Congress on the Medicare Catastrophic Coverage Act of 1988. And

I want to just review a little bit of what went on, and so I am going

to quote rather liberally from an editorial that was written by Dan

Rostenkowski for the January 17 Wall Street Journal, and it goes

something like this:

‘‘Given Ronald Reagan’s conservative reputation, many people

are surprised to hear that he enthusiastically signed the largest

Medicare expansion in history. That 1988 legislation limited the

costs of hospitalization and partially paid for prescription drugs.

The plan was wildly popular and it passed with overwhelming bipartisan support, 328 to 72 in the House.’’

‘‘Today it is equally surprising to hear that the following year

George Bush signed legislation repealing that expansion. The reversal was by far the largest cut in Medicare benefits in history,

but the repeal legislation passed the House by a 360 to 66 vote, the

most sudden and drastic reversal in my 36 years in Congress,’’ said

Mr. Rostenkowski.

He goes on. He says, ‘‘The problem was, and still is, a lack of

money, the result of senior citizens’ reticence to pay more. Debating

the wisdom of the Reagan era expansion plan, Senator Alan SimpVerDate 11-MAY-2000 13:23 Jul 12, 2000 Jkt 064041 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HEARINGS\62971 pfrm07 PsN: 62971
15

son said at the time, ‘It is a social experiment. It’s called pay for

what you get.’ ’’

Rostenkowski said, ‘‘The plan was financed by a premium increase for all Medicare beneficiaries, supplemented by extra payments from more affluent recipients.’’ Rostenkowski says, ‘‘In hindsight, we made several mistakes. The first was to break precedent

and ask that the group receiving the benefits actually pay for them.

The second involved timing. We adopted a principle universally accepted in the private insurance industry: People pay premiums

today for benefits they receive tomorrow. Apparently, the voters

didn’t agree with these market principles.’’

‘‘Television critics’ archives preserve the image of unhappy Chicago senior citizens surrounding my car’’—this is Rostenkowski——

Mr. BILIRAKIS. Please sum up, doctor.

Mr. GANSKE. [continuing] ‘‘when I visited a decade ago to explain

why I thought Medicare expansion was a good deal.’’

Then if you look at what went on, you will see that the initial

projections—and this is from the Washington Post, August 1989, so

it is before the provision went into effect—the initial cost estimates

for the prescription benefit at that time for this program was $37

billion, but within a few months they had raised it to $42 billion

and then $45 billion.

And my point is this, Mr. Chairman. When we look at this problem, we have no idea what a prescription drug benefit is going to

cost because we have an explosion of technology going on. We will

see genetic——

Mr. BILIRAKIS. I’m sorry to interrupt, but your time has long expired.

Mr. GANSKE. [continuing] drugs that are going to be very expensive. So I think we need to make a decision. If we are going to provide some Federal funds to help those neediest, how do we do that

without an open-ended commitment that could bust the bank and

bring us back a year from now, a la 1988?

Mr. BILIRAKIS. The gentleman from Florida, Mr. Deutsch.

Mr. DEUTSCH. Thank you, Mr. Chairman. You know what? I

have a prepared statement which I would like to submit to the

record, but I think it appropriate to respond to what my colleague

just mentioned. I think the year which is more appropriate to reflect upon is 1965, and that is when Medicare was created. I think

that is a much more appropriate analogy to where we are today.

Thirty-four years ago, health care in American was fundamentally different than it is today. There have been these fundamental

changes, and a variety of statistics that we can talk about. The average cost that a senior, the percentage of their income paid out of

pocket is actually more today, even with Medicare, which talks

about the costs that are outside of Medicare, including the most

significant one, which is prescription drug coverage.

You know, I think some of the numbers, and numbers sometimes

really do say things that are significant, there are more than 2 million seniors in America that spend over $1,000 a year on medication out of pocket, without reimbursement. Since Medicare, you

know, average spending has risen from 11 percent in 1965 to over

18 percent now. It was 11 percent in 1965; it is over 18 percent of

their income today.

16

The reality is, and it is not just the poor, it is at many income

levels, that people are making choices. I know many of my colleagues have had hearings in their district and talked to real people. I mean, I would encourage all of my colleagues to talk to their

constituents. I mean, all of us sort of claim to, but sometimes I

wonder how many of us actually do, actually do and talk to seniors

and talk to real people, and what they are faced with on a day-today basis in terms of their lives.

The choices that people were making 30 years ago, whether

health care or food or to visit their grandchildren one time in 6

months or one time in a year, I mean, those are similar choices

people are now making about prescription drugs. Not everyone, obviously, but a significant number of Americans and our constituents.

You know, I think this is clearly an issue whose time has come.

Medicare wasn’t passed in 1 hour, in 1 day, in one congressional

session. It was fought tooth and nail, unfortunately, I think it goes

without saying, by—and I don’t like to be partisan so I won’t be

partisan—but by certain Members of Congress for many years. It

was successfully fought, by certain interest groups, was successfully fought for years.

But I think at a certain point what happens in the legislative

process is it is overdetermined, and I think we are looking at something that in fact is overdetermined. The American people want

this. It is appropriate, it is commonsense, it makes sense, it should

happen, and you know what, it will happen.

And I hope that there is a bridge that lasts between us, because

it is the right thing. I applaud my chairman, my colleague from

Florida, for having this hearing and being incredibly concerned and

sensitive to this issue. And I urge all of my colleagues on both sides

of the aisle to take this opportunity which we as Democrats offer

you today, to sign a discharge petition, to sort of put your money

where your mouth is and actually get this legislation passed for the

American people.

Mr. BILIRAKIS. A vote has been called on the floor. I would love

to be able to get the opening statements out of the way before we

run over.

Mr. Bilbray, for an opening statement. Hopefully you can cut it

down.

Mr. BILBRAY. Thank you, Mr. Chairman.

Mr. Chairman, I know many members of this committee and the

full committee get kind of tired of those of us in California saying

we do it this way or that way, and I understand that. I have been

educated in the ABC’s of Washington: Anybody but California. But

I think that one of the frustrations we have had out West is that

we are so far from Washington, DC, it is hard for our voices to be

heard sometimes, even though with 32 million people, the small intimate group.

Today I want to really thank a lady for coming, Mrs. Lewis, who

actually works with the osteoporosis group, she is a director in San

Diego, and took the time and the effort to fly all the way across

this continent to bring a message here. And I don’t think she has

the only message that we should be listening to, but I think it is

one of the opportunities that we have as we address this challenge.

17

And I want to thank Mrs. Lewis for coming out here and making

this effort, because I think she has a message of some of the unique

situations and some of the ideas that we have developed in San

Diego, in California.

That aside, I think that as we address this issue, it is not as simple as we would like it to appear at first blush. We can talk about

why don’t we spend more government funds on this, but then do

we allow the pharmaceuticals to take advantage of an inflated

price because of the huge influx of government money going into

this field?

Do we then all at once try to place price controls on and limit

profits, which then may affect the commitment, the involvement in

the development of new breakthrough drugs, and all at once not

only reduce the accessibility to seniors but also the general population? Do we at the same time, when we talk about this issue, do

we talk about R&D credits, about encouraging pharmaceuticals to

do more research, to create new products that will compete with

the ones on the field and break up some of these monopolies we

have seen before?

My colleague from Oklahoma points out the issue of advertisement, which is something that we legitimately should talk about.

I think that the biggest thing that I would ask us to consider

here is what we do with this issue does just not affect seniors. It

affects the entire country, because access to pharmaceutical drugs

and the breakthroughs and the miracles that we are seeing coming

out of this industry comes at a price.

But it also requires us to take a responsible approach to this,

that the abuses of the pharmaceutical industry in this field is the

enemy, but the pharmaceutical industry is not the enemy. It is obviously the guiding light of the future. And, as my colleague from

Pennsylvania pointed out, there would not be a threat of major increased costs if there wasn’t the fact that we are having these

breakthrough drugs showing up every day, new breakthroughs.

And so I think that we need to be responsible, and I strongly

urge my colleagues to remember that this is not a Democrat or Republican issue, this is not a California or an East Coast issue. This

is an American issue that is really leading the rest of the world,

and hopefully we can get the facts, find reasons to find answers

rather than finding excuses to be against each other, and keep an

open mind.

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. BILBRAY. Thank you, Mr. Chairman. I yield back.

Mr. BILIRAKIS. Mr. Green, a brief opening statement, please.

Mr. GREEN. Thank you, Mr. Chairman. I will submit my whole

opening statement.

Mr. BILIRAKIS. Without objection.

Mr. GREEN. Following my colleague from California, I thought I

was the only one that said how we do it in Texas is the way we

should do it in the country. My concern is, we don’t do it in Texas,

and that is why we need to do it here as well as we should.

And I know signing a discharge petition is one way to move the

issue forward. I thank you, Mr. Chairman, for this second hearing.

And I would hope that whether it is the discharge petitions, the

two bills, or some other bill that maybe our subcommittee can put

18

together, we need to address this issue this Congress. And because

of the number of seniors that not only contact me, but from all over

the country that talk to their Members, and like my own district

does with the people who say they have to forego their prescriptions because they can’t afford them. They are using most of their

Social Security check to pay for their prescription medications.

And, Mr. Chairman, it is an important issue, because when I can

go into my district and show that seniors are paying almost twice

as much for prescriptions than other groups that have negotiating

power can receive, when they pay over twice as much and my constituents in Houston can drive to Mexico and receive those—it is

a 6-hour drive from Houston—and buy the same pharmaceuticals,

or that they could go down to their vet and buy those same pharmaceuticals for their animal, it is much cheaper than for humans.

So that is why it is important this Congress to address it, and I

yield back my time.

[The prepared statement of Hon. Gene Green follows:]

PREPARED STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF TEXAS

Mr. Chairman: Thank you for convening this important discussion. I am pleased

to have this opportunity to learn more about models for a prescription drug program.

Most of us agree that the lack of prescription drug coverage for our seniors is a

real and growing problem.

And it is not just a problem for the poor—it is a problem for middle-income seniors who worked hard their entire lives, paid taxes, contributed to building our great

country and are now forced to choose between buying medicine and buying groceries.

I urge those here today—with their charts, numbers and figures, to remember

that these percentages are people... and these people are in desperate need of prescription drugs.

There are many ideas and options out there for how to put together a drug program. Some support the state-run method... others support vouchers... others support tax credits.

All these approaches have their pros and cons, and I have no doubt that all are

proposed in good faith.

But as we continue this debate, we need to judge each of these proposals by a

few important criteria.

Number one: Does the proposal continue Medicare’s traditional program structure by covering ALL seniors?

Number two: Does the proposal provide free or reduced-price coverage to low income seniors?

Number Three: Does the proposal ensure that seniors get the same benefits—

and access to the same or similar drugs—in all regions and regardless of whether

they are in fee-for-service or managed care plans?

Number Four: Does the proposal ensure that the Medicare program continues

its legitimate role in ensuring that the prescription drug program is fair and costeffective?

Number Five: Does the proposal ensure that seniors will have consumer protections and that they will continue to get benefits, even if an insurance company goes

out of business?

As we continue the debate on how to model a prescription drug program, I urge

my colleagues to consider these five points and to measure all proposals against

them. A drug benefit program that only covers a few, or only provides a limited benefit, will be of little or no use to America’s seniors.

Only by crafting a full and fair benefit can we meet the needs of our seniors. Anything less is unacceptable.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Lazio.

19

Mr. LAZIO. Thank you very much, Mr. Chairman. I want to

thank you as well for holding the hearing, and it has been a pleasure working with you on this issue, and I want to thank the staff

as well.

I guess my quick question is, how much good are we going to do

for seniors if our only concern is cost, which is what I think I hear

from some members on this panel, and the issue of quality is effectively dismissed?

This past Sunday night ESPN hosted their Espy awards. Usually

the show highlights world records, Super Bowls and record-high

salaries, but this year they also awarded a 1999 comeback athlete

of the year award to Lance Armstrong. He made world headlines

last summer with the most stunning comeback ever in the history

of sports, his 1999 victory at the Tour de France.

As most of us know, his stunning comeback has less to do with

his athletic achievement, since he was the No. 1 ranked cyclist in

the world in 1996, but more to do with his amazing victory from

cancer. In the fall of 1996 Armstrong was diagnosed with testicular

cancer. The cancer spread to his lungs, and he was given about a

20 percent chance of survival. He was 25 years old.

For the next 2 years he aggressively attacked his illness like he

did racing bicycles. However, he couldn’t do it alone. In his acceptance speech he spoke about how his competitive nature and will to

live was not enough. He needed the best therapies and medicines

available to him to win this battle with cancer. Without research,

he said, he would not have been there to accept the award.

That is true with cancer and diabetes and a whole rift of different diseases that plague both seniors and the rest of the population. Access is the key, and price controls in my opinion are not.

Price controls do not allow new breakthrough medicines and lifesaving therapies to reach my constituents.

I just want to take one example, two examples, and briefly, Mr.

Chairman. The story of a Long Island senior who wrote me in disgust about the President’s plan. She had approximately $500 in

drug costs last year. Under the Clinton plan she would have to pay

$552.40 for her prescriptions. Well, that doesn’t make sense. She

is paying $52.40 extra each year to belong to Clinton’s plan, and

we are supposed to call this a benefit.

I have also received a large amount of constituent mail regarding

a new, wonderful, but extremely expensive drug for rheumatoid arthritis. Many people are aware of it. For this $14,000-per-year

drug, a senior participating under the Clinton plan would still be

paying $12,697 per year, and we are supposed to call this a benefit.

I think we can do better.

We know there are market-oriented solutions, at least to alleviate part of the pressure, through PBMs and other mechanisms that

will help drive the price down. We know if we get more seniors or

all seniors into plans like that, they will be able to take advantage

of the same discounted prices and price rebates that seniors participating in Medigap and other insurance that covers prescriptions

get. And we also know that if we have a federally mandated price

control system in place, that we will not have the kind of breakthrough drugs that people like Lance Armstrong were able to use

to triumph over his illness.

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Mr. BILIRAKIS. Let’s make the vote. The gentleman’s time has expired.

[Additional statements submitted for the record follow:]

PREPARED STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF MICHIGAN

Mr. Chairman, thank you for holding today’s hearing to examine ways in which

we might craft a prescription drug benefit for Medicare beneficiaries. I am deeply

concerned about the burden borne by many individuals who do not have insurance

coverage for prescriptions. No senior citizen should be forced to forego needed medication, take less than the prescribed dose, or go without other necessities in order

to afford life-saving medications.

I read and sign all of my mail, and I have seen a dramatic increase over the past

several years in the number of Medicare beneficiaries writing to me about the struggle they are having with rising prescription drug costs. These are not form letters

I am referring to. They are hand written letters—often with their bills enclosed. We

are fortunate in Michigan to have a state prescription drug program, but this covers

only low-income individuals with high monthly drug costs. Further, we have no

Medicare managed care plans in our district because Medicare’s payment rates are

too low to attract plans. Thus, my constituents are denied access to coverage

through this route. Yet they have paid the same Medicare payroll taxes into the system over the years and pay the same monthly premiums as beneficiaries who do

have this choice. This is a matter of fairness, as well, for my constituents.

Because of my keen interest in addressing this issue, I am very glad to be serving

with you the House Leadership’s prescription drug task force led by our Chairman.

Our nation leads the world in the development of new drugs and medical devices

that enable us to effectively treat diseases and conditions. But if people cannot afford to buy these drugs, their benefits are lost to many in our population.

I share the task force’s goal of and commitment to ensuring that every Medicare

beneficiary has access to affordable coverage and has protection from unusually high

out-of-pocket costs. I am committed to crafting a plan that is senior friendly—one

which avoids the often complex, complicated bureaucracy of the current Medicare

program.

Our goal in crafting this plan must also be one of ensuring that our nation continues to lead the world in the development of life-saving new drugs. Over the past

decade, we have seen so many breakthroughs in drug therapy, from a new, much

more highly effective treatment and perhaps preventive for breast cancer, to antivirals for AIDS and other diseases, to treatments for cystic fibrosis. As we continue

to map the gene and understand more fully the link between genes and disease,

think of the possibilities. We are perhaps within reach of preventing or curing diabetes, Parkinson’s, Alzheimer’s, and other debilitating and terrible afflictions. As

our population ages, we need to encourage further breakthroughs in the prevention,

treatment, and management of chronic, debilitating conditions such as arthritis and

osteoporosis, for that is the only real hope of controlling health care costs. Crippling

the incentives and resources needed for new drug discovery and development would

dash these hopes, leave these promises unfulfilled, and condemn many to suffering

and premature death.

The task before us is daunting. It will take all of us, Republicans and Democrats,

Ways and Means and Commerce, House and Senate and Administration, working

together to pull this off and plug a huge hole in the Medicare program with a common-sense, workable, comprehensive drug benefit. We need to put aside partisanship and short-term political considerations and do what is right for our constituents and for the future of health care in America.

PREPARED STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF FLORIDA

Thank you, Chairman Bilirakis, for holding this important hearing. Today’s hearing will focus on various proposals for providing prescription drug coverage to seniors who do not have access to affordable coverage.

I believe that we need to figure out how to expand insurance coverage for drugs,

not attempt to give the government the ability to fix prices. Price controls never

work. All they do is reduce supply or eliminate discounts that are available to some.

As a matter of fact, the Omnibus Budget Reconciliation Act of 1990 (OBRA) required drug manufacturers to provide rebates to State Medicaid programs based on

21

the lowest prices they charged to the purchasers in an effort to lower Medicaid

drugs prices.

As Chairman of the VA Subcommittee on Health, this is an issue that I’m very

familiar with. In fact, in July 1997 we received testimony from Ms. Bernice

Steindardt, of the GAO’s Health, Education and Human Services Division, about

this mandate. She told the subcommittee that the end result of the 1990 OBRA drug

rebate was that many manufacturers raised drug prices (because of the size of the

Medicaid market) to minimize the impact of the rebates. That is why we must be

cautious in moving in the same direction as a way to provide our seniors with prescription drug coverage.

One of the proposals we will hear about today is legislation to provide lower

wholesale prices of drugs for Medicare-affiliated pharmacies. This has the potential

of repeating the disastrous effects that were created by OBRA 90. Why is this the

case? Because manufacturers would have a strong incentive to raise those ‘‘lowest’’

prices substantially in order to keep from losing their profit margins.

The bottom line is that there is no simple solution to our problem.

By enacting the Medicare Plus Choice program as part of the Balanced Budget

Act of 1997, Congress sought to expand Medicare beneficiaries access to prescription

drugs by allowing them to join health plans that offer this benefit. Congress’ goal

in the BBA was to extend to Medicare beneficiaries the same range of choices that

exist for working Americans. Choosing between competing health plans offers Medicare beneficiaries greater promise of accessing the drugs they need than will government price controls.

The bipartisan commission developed a proposal that is worth real discussion. The

Breaux-Frist bill (S. 1895) would provide Medicare beneficiaries the same options

that most federal employees, including the President and members of congress have.

We should allow seniors the opportunity to take advantage of the changes in health

care delivery benefiting every privately insured person. I am pleased that we are

finally talking about this innovative and free market approach to help senior citizens.

We need to help them gain access to affordable prescriptions through insurance

coverage and the truly effective price competition of an active marketplace.

That is why I support the Breaux-Frist bill because it would restructure Medicare,

using the Federal Employees Health Benefits Program (FEHBP) as a model. This

would ensure that seniors would have access to newer drugs and devices because

they would choose the plan they want.

I look forward to hearing distinguished witnesses.

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

I’m pleased that the Subcommittee is holding this hearing today. This is the third

hearing this Committee has held on the topic of senior citizens access to prescription

drugs.

I’ve been studying this issue closely for a number of months now and it is a tough

one. It is clear that too many seniors have trouble affording their medications. It

is equally clear that many seniors have drug coverage today that they like and don’t

want threatened by anything we do in Congress.

Americans have the best health care in the world. My first goal in helping seniors

afford medicine is to preserve what is good about our health system today. We are

on the edge of remarkable breakthroughs in new drug therapies to treat and even

cure diseases that just ten years ago were considered death sentences. We don’t

want to do anything to jeopardize this work.

Yet, America’s role as the world leader in drug research has its costs. Our challenge is to find ways to make sure seniors have access to needed medication without

resorting to price controls or big-government drug purchasing schemes.

Many folks under 65 years old are fortunate to have health insurance to cover

most or all of the costs of their prescription drugs. But Medicare does not pay for

most prescription drugs for seniors. In my opinion, this shows that if a private insurance company tried to market and sell the Medicare benefit to Americans today,

I would bet few would buy it—Medicare does not reflect how modern medicine is

practiced and delivered.

This is why I truly want to explore a way to give seniors access to all the private

health coverage options available to Americans under the age of 65. Every Member

of Congress has this choice. Lets give seniors the same choice.

I want to develop legislation that provides all seniors access to affordable, private

drug coverage. I believe we should assist those seniors who cannot afford to purchase this coverage. And I think it is critical that whatever we do, that we protect

22

not only low-income seniors but those who have very high annual out-of-pocket drug

costs.

Whatever is done to help seniors with their drug costs, it must minimize the substitution of private health coverage with government run programs. Our first witness today, Mrs. Rita Lewis, will talk about her own experience. Like millions of

other seniors, Rita is worried that Congress will harm her coverage. There has to

be a way for us to strike a balance for those who need coverage and those who are

already covered.

Again, I want to thank the Chair for holding this hearing and look forward to the

witnesses testimony.

PREPARED STATEMENT OF HON. SHERROD BROWN, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF OHIO

Should the Medicare program offer prescription drug coverage? What good is insurance if it covers the diagnosis, but not the cure? Of course Medicare should cover

prescription drugs.

But why can’t we target coverage to just the lowest income seniors? Two reasons.

Medicare works because every American contributes to it and every American

benefits from it. A third of all seniors lack drug coverage, millions more are underinsured, employers are dropping their retiree coverage and private health insurers

are ratcheting down their prescription drug benefits. This is a broad-based problem.

Whether or not Medicare should cover prescription drugs is not a real question.

If you believe this nation benefits from helping seniors live in good health and above

poverty, than Medicare should cover prescription drugs.

But it is expensive to cover prescription drugs. Can the U.S. afford it? Yes and

no.

We are the wealthiest nation in the world. Our retirees are collectively responsible for our current prosperity. Their security and well-being resonate across families, communities, and ultimately the nation. We can afford to—it is in out best interest to—provide seniors health care coverage that makes sense and that means

providing prescription drug coverage.

But we can not afford to waste tax dollars that otherwise could be used to bolster

Medicare’s long-term solvency. We can not afford to be ripped off. To be fiscally responsible, to best serve the public, we need to pay fair prices for prescription drugs.

So the question is, are current prices fair?, if you define ‘‘fair’’ as meaning ‘‘necessary’’ to finance future research and development.

Maybe prices are fair. Maybe drug companies have no choice but to charge such

high prices. I doubt it. Knowing how much drug companies are investing in marketing, knowing what their profit margins are, not to mention their CEO salaries,

and knowing any reduction in prices could be largely offset by increase in the volume of sales, I doubt prices need to be this high. But even if drug manufacturers

could justify their revenue requirements. How could they justify placing such a disproportionate burden on Americans?

How can they justify charging Americans two and three and four times what they

charge individuals in other industrialized countries? Why are prescription drugs

more expensive here? Because other countries won’t tolerate outrageous prices. We

do. We don’t negotiate prices. We don’t demand that drug manufacturers reduce

their prices to reflect the federally funded portion of research and development. And

we don’t make use of the collective purchasing power of 38 million seniors to demand fairly priced drugs. Instead, we nod our heads when drug manufacturers warn

us that any action we take would stifle research and development.

Drug prices can come down in the United States without stifling research and development. Take the case of medical devices. The Medicare program is the largest

purchaser of medical devices in the United States. The Medicare program pays discounted prices for medical devices and yet new devices are developed every day. Obviously a fast way to make money is to charge inflated prices for prescription drugs.

It works beautifully for a product so important to so many people. That does not

make it necessary.

So, what do we do about high prices? The drug industry says the best way to

make prescription drugs affordable for seniors is to enroll all 38 million in private

health insurance plans. I’m not sure I follow their logic. Look at what is happening

in the private insurance market today. Health insurance premium increases are

back in the double digits. Insurers blame prescription drug costs. Enrollees in private plans can expect higher co-pays and lower prescription drug caps.

One of the fundamental truths about health insurance is the larger the pool of

enrollees, the more stable the premiums and benefits will be. Fragmenting the risk

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pool has never been a good idea and it is certainly not a good idea when it comes

to such a big ticket item as prescription drugs.

We have other options. I have introduced legislation that would give drug manufacturers a choice. They could either disclose their true costs and work with us to

bring prices down, or they could license their patents to generic drug companies and

let the free market bring prices down to a more reasonable level. Mr. Allen has introduced legislation that would permit seniors to purchase drugs at discounted

prices. Mr. Sanders and Mr. Barry have introduced legislation that would permit

us to import drugs when they are priced less expensively in other countries.

So I ask you again. Should Medicare provide prescription drug coverage for seniors? Yes. Will it be expensive? Yes. Is there something we can do to make it less

expensive? Yes. Now is the time to stop debating this issue, and do what is right

for seniors.

Thank you, Mr. Chairman.

PREPARED STATEMENT OF HON. ANNA G. ESHOO, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF CALIFORNIA

We’ve spent a great deal of time this Congress talking about the need to shore

up the Medicare program.

Yes, we must ensure the solvency of the program but we must also modernize it.

The key to ensuring that the program covers the best that medical science has

to offer is to provide a comprehensive prescription drug benefit.

When Medicare was created in 1965, seniors were more likely to undergo surgery

than to use prescription drugs.

Today, prescription drugs are often the preferred, and sometimes the only, method

of treatment for many diseases.

In fact, 77% of all seniors take a prescription drug on a regular basis.

And yet, nearly 15 million Medicare beneficiaries have no insurance coverage for

prescription drugs whatsoever.

This means that a lot of senior citizens—most of whom are on modest, fixed incomes—are spending a great deal of their monthly incomes on prescription drugs.

In fact, 18% of seniors spend over $100 a month on prescriptions.

My senior constituents have told me about being forced to limit the amount they

spend on groceries in order to pay for their prescription drugs.

For some seniors, enrolling in Medicare managed care plans has provided them

drug coverage. However, 11 million beneficiaries don’t have access to any managed

care plans.

During the last two years, Medicare managed care plans have withdrawn from

many regions, standing thousands of seniors, many of whom only signed up to get

drug coverage in the first place.

Today, only 16% of Medicare beneficiaries are enrolled in Medicare HMOs.

Many managed care plans are dropping or severely limiting coverage. A recent

Kaiser study found that current drug coverage in Medicare+Choice plans varies

greatly and may be in jeopardy altogether as plans face declining profits.

We can’t rely solely on the private sector to provide this service. Prescription

drugs must be included in the basic Medicare benefits package. And it must be affordable.

When he enacted the Medicare program, President Johnson said, ‘‘the benefits of

this law are as varied and broad as the marvels of modern medicine itself.’’

I think we can all agree that the tremendous advances prescription drugs have

made in the diagnosis and treatment of every illness from arthritis to Alzheimer’s

are today’s greatest ‘‘marvels of modern medicine.’’

Thirty-nine million seniors are relying on us to make sure they have access to

these marvels. Let’s not disappoint them.

Thank you, Mr. Chairman. I look forward to hearing from the witnesses.

Mr. BILIRAKIS. I would ask the first panel to come forward, and

as soon as I return, we will get started. Thank you.

[Brief recess.]

Mr. BILIRAKIS. I ask Mrs. Rita Lewis and Dr. Beatrice Braun to

please come to the table, take their seats. As Mr. Bilbray has already introduced her, Mrs. Rita Lewis is director of the

Osteoporosis Support Group of San Diego; and Dr. Beatrice Braun

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is a member of the Board of Directors of AARP. Welcome, good ladies. I appreciate very much your being here.

Your written statement that you have already submitted to the

committee is already a part of the record. We will give you 5 minutes to hopefully supplement it or complement it, if you will. Mrs.

Lewis, please proceed. Take your time, but move that mike close

because we certainly want to hear everything you have to say.

STATEMENTS OF RITA H. LEWIS, DIRECTOR, OSTEOPOROSIS

SUPPORT GROUP OF SAN DIEGO, CALIFORNIA; AND BEATRICE BRAUN, MEMBER, BOARD OF DIRECTORS, AARP

Mrs. LEWIS. Can you hear me?

Mr. BILIRAKIS. Yes.

Mrs. LEWIS. Good morning. It is a great honor to be here today

before the Commerce Committee to share my thoughts about the

Medicare program and prescription drugs.

My name is Rita Lewis. I am 80 years old, and I live in San

Diego, California. For the past 16 years I have received my Medicare benefits through a private health plan. I am very pleased with

the quality of the care I receive from my doctors, nurses, and other

health care providers.

As a resident of San Diego, I have a wide variety of plans available to me. I stay with my plan because it works for me, and the

doctors and nurses have never let me down. For the $15 a month,

I receive top notch care. The 11 medications I take daily have minimal cost.

One of the best features of my plan is that I have so much less

paperwork than friends of mine who are in the old Medicare program. They spend hours on the phone trying to sort out their bills.

With my plan, it is easy to understand. When I go to my physician,

I pay $5, and when I was hospitalized on several occasions, my private plan picked up 100 percent of the costs. This gives me peace

of mind.

Now, I would like to take a moment to talk about my own medical condition. When I was in my early 60’s, I learned that I had

osteoporosis, the bone disease that affects older women and some

men. My doctors tried every available medicine to stop my bone

loss, but they did not work and I lost over seven inches in height.

My condition was so bad that my husband could not give me a hug

without breaking one of my ribs, sometimes two.

A new drug was developed to stop the deterioration of my bones.

My doctor immediately prescribed this medication and I began to

see the effects. The progression of my osteoporosis was stopped,

and I have actually had bone mass increases. With the discovery

of this new drug, I am now able to walk again every morning, 40

to 45 minutes, at a fast clip now.

In addition to osteoporosis, I have several other medical conditions that are treated with prescription drugs. In total, I take eight

medications a day and three calcium pills that amount to 11 pills.

These drugs are vital to my health. My plan covers most of the

costs for these drugs. My co-pay ranges from $10 to $30 for a 90-

day program. I order my prescriptions by telephone or through my

mail order program. Some are new brand name drugs, like my

25

osteoporosis drug, and others are generic. It costs me in the neighborhood of $600 a year for my prescription drugs.

I understand that some Members of Congress would like to add

prescription drugs to the Medicare program. I am concerned that

a large government approach will be confusing and will cost more.

Like my husband Aaron says, ‘‘There is no free lunch.’’ While it is

important for seniors to have access to prescription drug coverage,

I think that plans like mine provide the best solution.

In closing, let me leave you with one final thought. I am 80 years

old. I take eight medications a day. I see many doctors and nurses,

and I have been in and out of the hospital. My health care plan

works for me. I would like more healthy years to enjoy my husband, my children, my grandchildren, and so do a lot of other seniors. Please remember seniors like me when you consider changing

Medicare. And thank you.

[The prepared statement of Rita H. Lewis follows:]

PREPARED STATEMENT OF RITA H. LEWIS

Good morning. It is a great honor to be here today before the Commerce Committee to share my thoughts about the Medicare program and prescription drugs.

My name is Rita Lewis. I am 80 years old and I live in San Diego, California.

For the past 16 years, I have received my Medicare benefits through a private

health plan. I am very pleased with the quality of the care I receive from my doctors, nurses, and other health care providers.

As a resident of San Diego, I have a wide variety of plans available to me. I stay

with my plan, because it works for me and the doctors and nurses have never let

me down. For $15 dollars a month, I receive top notch care. The 11 meds I take

daily have minimal cost.

One of the best features of my plan is that I have so much less paperwork than

my friends who are in the old Medicare program. They spend hours on the phone

trying to sort out their bills. With my plan it is easy to understand. When I go to

my doctor, I pay $5. And when I was hospitalized on several occasions, my private

plan picked up 100 percent of the costs. This gives me peace of mind.

Now, I would like to take a moment to talk about my own medical condition.

When I was in my 60s, I learned that I had osteoporosis, the bone disease that affects older women, and some men. My doctors tried every available medicine to stop

my bone loss, but they did not work and I lost over seven inches in height. My condition was so bad that my husband could not give me a hug without breaking one

of my ribs.

A new drug was developed to stop the deterioration of my bones. My doctor immediately prescribed this medication and I began to see the effects. The progression

of my osteoporosis was stopped and I have actually had bone mass increases. With

the discovery of this new drug, I am now able to walk again on my own and without

canes. I keep fit by walking five days a week for 40-45 minutes.

In addition to osteoporosis, I have several other medical conditions that are treated with prescription drugs. In total, I take 8 medications a day and three calcium

pills, for a total of 11 pills. These drugs are vital to my health. My plan covers most

of the costs for these drugs. My copay ranges from $10 to $30 for a 90-day supply.

I order my prescriptions by telephone or through my mail order program. Some are

new brand name drugs, like my osteoporosis drug, and others are generic. It costs

me about $600 a year for my prescription drugs.

I understand that some Members of Congress would like to add prescription drugs

to the Medicare program. I am concerned that a large government approach will be

confusing and will cost more. Like my husband Aaron always says, ‘‘there is no free

lunch.’’ While it is important for seniors to have access to prescription drug coverage, I think that plans, like mine, provide the best solution.

In closing, let me leave you with one final thought. I am 80 years old. I take 8

medications a day. I see many doctors and nurses and I have been in and out of

the hospital. My health care plan works for me. I want more healthy years to enjoy

my husband, children, and grandchildren and so do other seniors. Please remember

seniors like me when you consider changing Medicare.

Mr. BILIRAKIS. Thank you very much, Mrs. Lewis.

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Dr. Braun, please proceed.

STATEMENT OF BEATRICE BRAUN

Ms. BRAUN. Good morning. I am Bea Braun, from Spring Hill in

Florida, and a member of AARP’s Board of Directors, and I truly

thank you, Mr. Chairman and members, for the opportunity to testify today.

As we all know, since it was enacted Medicare has provided access to affordable health care and has kept many older people out

of poverty, but the challenges are very large that we now face. As

a retired physician, 50 years out of medical school, I have seen the

practice of medicine change dramatically, particularly in the area

of prescription drugs. Penicillin was just coming in when I was in

medical school.

Simply stated, prescription drug coverage is smart medicine. Yet,

while most employer plans include drug coverage, Medicare does

not. We are pleased that Congress, the administration and the

drug industry recognize that prescription drug coverage must be a

part of a strengthened Medicare program. The only question is how

to do it.

The AARP believes that a Medicare prescription drug benefit

must be available to all and affordable for all beneficiaries, but the

benefit should be voluntary so no one has to give up what they already have, as Mrs. Lewis says. And the benefit must be affordable

for all beneficiaries, and not just those with low incomes. The benefit needs to assure that it helps middle income beneficiaries handle mounting prescription costs.

Equally important, it needs to ensure enough participation in the

benefit to avoid risk selection. One of Medicare’s greatest strengths

has been its success in pooling the risk of nearly 40 million beneficiaries. This has let Medicare avoid the cherry-picking that exists

in the under-65 health insurance market. This broad risk pool

must be sustained in order to keep Medicare strong and affordable.

While 65 percent of beneficiaries may have some type of drug

coverage, the employer-based retiree coverage is declining rapidly.

Medigap coverage is very expensive, and limited in what and who

it covers. And managed care coverage has proven unstable. Premiums are going up, and in many cases there have been pull-outs

from various counties in the country, including my own.

I am not attempting today to give a full review of the prescription drug proposals before Congress. That will take many more

hearings. But as Congress undertakes this effort, I would like to

raise the following fundamental questions that need to be answered by any drug proposal:

Will the proposed prescription drug coverage be affordable to

beneficiaries, and assure a viable risk pool for the program? These

go hand-in-hand. How would insurers be prevented from cherrypicking beneficiaries? How would beneficiaries with very high drug

costs be protected? Does the proposed benefit meet the needs of

current and future beneficiaries?

AARP is reserving judgment on current proposals until these and

other questions about their impact on beneficiaries and the program itself are answered. How to provide Medicare beneficiaries

with affordable prescription drugs is a huge challenge. We urge the

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Congress, the drug industry and consumers to engage in a serious

debate on the merits of the full range of approaches.

The success of any drug benefit proposal, as well as broader

changes in Medicare, depend on a clear understanding on the part

of the public and policymakers alike of the changes being contemplated. This will require not only extensive dialog but also a

thorough analysis of how the proposal would affect current and future beneficiaries. In fact, if legislation is pushed through too

quickly, before the effect on beneficiaries is known, AARP would be

compelled to alert our members of the dangers in such legislation

and why we could not support it.

The AARP is committed to working with Members of Congress

on a bipartisan basis to advance the debate over prescription drug

coverage and to carefully explore the best options for securing

Medicare’s future. And I thank you, Mr. Chairman, for giving us

the opportunity and for your efforts to examine the high costs of

prescription drugs for our older Americans, including me.

[The prepared statement of Beatrice Braun follows:]

PREPARED STATEMENT OF BEATRICE BRAUN, AARP BOARD MEMBER

Mr. Chairman and members of the Committee, I am Beatrice Braun, a member

of AARP’s Board of Directors. I want to thank you for your interest in the issue of

the high cost of prescription drugs and the difficulties older Americans have in paying for needed medications. AARP appreciates this opportunity to share our perspective on the need for a Medicare prescription drug benefit and some of the broader

issues involved in reforming the Medicare program.

For over thirty years Medicare has provided older and disabled beneficiaries with

dependable, affordable, quality health insurance. I live in Florida, which has one of

the largest beneficiary populations in the nation. As a retired physician, I have seen

first hand how Medicare has made a difference in the lives of older Americans.

Medicare has been instrumental in improving the health and life expectancy of

beneficiaries in Florida and across the nation. It has also helped to reduce the number of older persons living in poverty.

Medicare’s promise of affordable health care extends beyond the current generation of retirees. Now, more than ever, Americans of all ages are looking to Medicare’s guaranteed protections as part of the foundation of their retirement planning.

AARP believes that in order for Medicare to remain strong and viable for today’s

beneficiaries, and for those who will depend on it in the future, we must confront

the key challenges facing the program.

Foremost among these challenges is ensuring that Medicare’s benefits and its

means of delivering care remain dependable even as they are updated to keep pace

with the rapid advances in health care. The practice of medicine has changed dramatically since the Medicare program was created. We are now living in a time of

amazing breakthroughs in medical technology. Among the most striking are the advances in the area of prescription drugs. Drug therapies that were not available

when Medicare began are now commonly used to prevent and treat virtually every

major illness. In many cases, new drugs substitute for or allow patients to avoid

more expensive therapies such as hospitalization and surgery. In other cases, drugs

facilitate treatment or provide treatment where none existed before, improving the

quality and length of life for the patient. As a result, prudent reliance on prescription drugs now goes to the very core of good medical practice.

Ironically, while older Americans typically need more medications than younger

people, most employer plans include and rely on prescription drug coverage as an

essential tool for medical management, but Medicare still does not. Consequently,

high prescription drug prices impose significant financial hardship on the millions

of Medicare beneficiaries who have inadequate or no insurance coverage for prescription drugs. It is important to remember that beneficiaries without coverage pay

top dollar for their prescriptions because they do not benefit from discounts negotiated by third party payers as do most younger persons. AARP believes prescription

drug coverage must be part of an improved Medicare program. Simply stated, prescription drug coverage is smart medicine.

The second challenge facing Medicare is our nation’s changing demographics. The

retirement of the baby boom generation will nearly double the number of Medicare

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beneficiaries in the program. Medicare’s financing and delivery systems must be capable of serving this enormous influx of beneficiaries whose health care circumstances, needs, and expectations will be similar in some respects to those of today’s beneficiaries, but very different in others. Just as important, longer life spans

are already causing rapid growth in the very old population. Medicare must be prepared to handle the unique health care needs of a growing number of older Americans who reach 85, or even 100.

To meet these challenges, the program’s long-term financial solvency must be secure. AARP supported the Balanced Budget Act of 1997 as a first step towards securing Medicare’s long-term solvency. The strong economy we now enjoy and the

Medicare Trustees’ projection of solvency to the year 2015 are good news. But, this

does not mean we can afford to become complacent or that we can delay the debate

over how best to strengthen Medicare.

The deliberation over Medicare’s future must be ongoing. It will take a sustained

effort to update and improve Medicare. Changing a program that millions of Americans depend on for their health care is no small task. There must be a careful and

thorough examination of the full range of issues—prescription drugs being only one

issue among them—and a similarly careful effort to make sure that policy makers

and the public alike understand the trade-offs that will be necessary.

AARP believes that it would be a serious mistake for anyone to hinder debate on

reform proposals. By the same token, it would be an error for the Congress to rush

to judgment on any reform option before policy makers and the public understood

the proposed changes and their anticipated effect on beneficiaries, providers, and on

the Medicare program in general. As we all learned over the recent BBA revisions,

earlier experiences with the Catastrophic Coverage Act in the late 1980s, and from

the health care reform debate of the early 1990s, unless the American public understands the trade-offs they are being asked to make, and the changes that they will

face, initial support can erode quickly.

THE NEED FOR A MEDICARE PRESCRIPTION DRUG BENEFIT

AARP is pleased that the Subcommittee has begun to examine the various Medicare prescription drug proposals before the Congress and is developing its own prescription drug benefit plan. The work you are embarking upon is extremely challenging; it is also immensely important to millions of Americans who take prescription medications. It is our hope that today’s hearing will help focus attention on the

need for an affordable Medicare prescription drug benefit for all beneficiaries, as

well as on other Medicare reform issues.

As new prescription drugs are becoming available to treat and even prevent more

and more serious conditions and life-threatening illnesses, reliance on these drugs

has become especially significant for older Americans. Eighty percent of retirees use

a prescription drug every day. While older Americans comprise only 12 percent of

the U.S. population, they account for one-third of prescription drug spending. In

fact, after premium payments, prescription drugs account for the single largest component of health care out-of-pocket spending, for non-institutionalized Medicare

beneficiaries age 65 and older. On average, these beneficiaries spend as much outof-pocket for prescription drugs (17 percent of total out-of-pocket health care spending) as for physician care, vision services, and medical supplies combined. By contrast, inpatient and outpatient hospital care each accounts for about 3 percent of

older beneficiaries’ total out-of-pocket health spending.

High use, high drug prices, and inadequate insurance coverage pose serious problems for today’s Medicare beneficiaries. A chronic health problem necessitating some

of the newest, most expensive prescription drugs can deplete a retiree’s financial resources. Some beneficiaries are forced to choose between food and their medications.

Others do not refill their prescriptions or take the proper dosage in order to make

their prescriptions last longer. A new international health care survey of the elderly

by the Commonwealth Fund reports 7 percent of adults age 65 and over did not

even fill a prescription due to cost.

Because of Medicare’s current lack of prescription drug coverage, many beneficiaries must pay for prescription drugs completely out-of-pocket. While some beneficiaries may have employer-based retiree coverage, or be able to purchase private

supplemental coverage that assists with costs, or join a Medicare HMO that offers

a prescription drug benefit, these coverage options are inadequate, limited, expensive, and unstable. For instance, a new study by the Commonwealth Fund, reports

that many Medicare beneficiaries do not have continuous prescription drug coverage. In 1996, just 53 percent of beneficiaries had prescription drug coverage

throughout the year.

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Although 65 percent of Medicare beneficiaries have some type of coverage for prescription drugs, this figure can be very misleading. In fact, the majority of Medicare

beneficiaries—not just those with low incomes—need drug coverage in Medicare.

Why?

First, Medicare beneficiaries’ current prescription drug coverage does not protect

them from high out-of-pocket expenses. AARP estimates that 25 percent of Medicare

beneficiaries spent over $500 out-of-pocket on prescription drugs in 1999, and over

half of these beneficiaries had some type of coverage. Forty-two percent of beneficiaries who spent $1,000 or more on their prescription drugs (excluding insurance

premiums) had some type of drug coverage. For example, some beneficiaries buy

Medigap policies that provide a drug benefit. Two of the three Medigap policies that

cover prescription drugs have an annual cap of $1,250 on drug coverage; the third

policy has a $3,000 cap. All three Medigap policies that have a prescription drug

benefit require the beneficiary to pay 50 percent coinsurance. It is interesting to

note that while Medigap drug coverage is quite limited, the premiums on these policies exceed $1,000 a year. Other beneficiaries choose to enroll in Medicare HMOs

that offer some prescription drug coverage. Yet, this year 32 percent of Medicare

HMOs offering drug coverage have a $500 cap that applies to brand or to brand and

generic drugs, and average copays in these plans have increased dramatically from

last year—an estimated 21 percent for brands and 8 percent for generics.

Second, current prescription drug coverage available to Medicare beneficiaries is

limited. Private Medigap policies may be the only option for obtaining drug coverage

for beneficiaries who do not have access to employer coverage or Medicare+Choice

plans. Yet, because almost all Medigap policies with drug coverage exclude beneficiaries based on pre-existing conditions once they have passed the first six months

of their Medicare eligibility, and because not all three Medigap policies that include

prescription drugs are not offered everywhere, many Medicare beneficiaries desiring

such coverage cannot obtain it. Additionally, although Medicare HMOs are prohibited by law from underwriting the coverage they offer, such plans are not available

in all parts of the country.

Third, current drug coverage options are not stable. For example, beneficiaries

who obtain prescription drug coverage from their former employer are finding that

coverage to be unstable. Retiree health benefits that include prescription drug coverage are becoming more scarce. While an estimated 60 to 70 percent of large employers offered retiree health coverage during the 1980s, fewer than 40 percent do

so today. Of those employers who offer retiree benefits, 28 percent do not offer drug

coverage to Medicare eligible retirees.

Further, beneficiaries who have drug coverage through Medicare HMOs cannot

depend on having this coverage from year to year as plans can change benefits on

an annual basis or even terminate participation in Medicare. For example, this year

many beneficiaries in Medicare+Choice plans are living through abrupt changes in

their prescription drug coverage that they did not foresee when they enrolled. Some

of the most visible of these changes include:

• Increasing premiums—Over the past few years, more and more Medicare+Choice

plans are charging premiums for their coverage, and those premiums are climbing. This year 207,000 beneficiaries must pay over $80 per month to enroll in

a Medicare HMO. This compares to 1999 when only 50,000 Medicare beneficiaries enrolled in Medicare HMOs had a premium above $80 per month.

• Higher cost-sharing—For the first time this year, all Medicare HMOs that provide

prescription drug coverage are charging copays for those prescription drugs, and

the average beneficiary copay has increased significantly.

• Decreasing benefit—The annual cap on the typical Medicare+Choice drug benefit

has decreased. While in 1999 only 21 percent of Medicare HMOs had an annual

cap of $500 or less on their drug benefit, this year 32 percent of plans will have

a $500 cap.

• Loss of benefit—This year some Medicare+Choice plans dropped their prescription

drug benefit entirely. Although Medicare+Choice has provided beneficiaries

with an opportunity for drug coverage, the volatility of the Medicare+Choice

market has made that coverage unpredictable and unstable from year to year.

ISSUES SURROUNDING ADDING PRESCRIPTION DRUGS TO MEDICARE

AARP is committed to the creation of a voluntary, affordable Medicare prescription drug benefit that would be available to all beneficiaries, so that they may benefit from longer, healthier lives, fewer invasive medical procedures, and reduced

health care costs. We appreciate the Subcommittee’s interest in this issue and look

forward to working with the Congress and the Administration to assure that a prescription drug benefit that is available and affordable to all Medicare beneficiaries

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becomes part of Medicare’s defined benefit package. To that end, we have identified

principles that we believe are fundamental to the design of a Medicare prescription

drug benefit:

• A Medicare prescription drug benefit must be available to all Medicare beneficiaries. First, the benefit should be voluntary so that beneficiaries are able to

keep the coverage that they currently have, if they choose to do so. A Medicare

prescription drug benefit should not be an incentive for employers to drop or

cut back on retiree health coverage. Second, the benefit needs to be affordable

to assure enough participation and thereby avoid the dangers of risk selection.

To this end, the government contribution will need to be sufficient to yield a

beneficiary premium that is affordable, and a benefit design that is attractive

to beneficiaries. In other words, this is not simply a matter of beneficiary affordability, but equally important, the fiscal viability of the risk pool. Medicare Part

B is a model in this regard. The Part B benefit is voluntary on its face, but

Medicare’s contribution toward the cost of the benefit elicits virtually universal

participation.

• Prescription drugs should be a defined benefit and part of a defined benefit package. It is critical that beneficiaries understand what is included in their benefit

and that they have dependable and stable prescription drug coverage. In addition, defining the drug benefit would reduce the opportunity for risk selection.

• The benefit must assure beneficiaries have access to medically appropriate and

needed drug therapies.

• The benefit must include quality improvement components to reduce medical errors and mismedication and to help reduce overall health care costs.

• The benefit must include meaningful cost-containment mechanisms for both beneficiaries and Medicare. This should include drug-purchasing strategies that enable Medicare beneficiaries and the program to take advantage of the aggregate

purchasing power of large numbers of beneficiaries.

• The benefit must provide additional subsidies for low-income beneficiaries to protect them from unaffordable costs and assure that they have access to the benefit.

• The benefit must be financed in a fiscally responsible manner that is both adequate and stable. AARP believes that an appropriate amount of the Federal

budget surplus should be used to help finance a prescription drug benefit.

• A new prescription drug benefit should be part of a strong and more effective

Medicare program. Prescription drug coverage must be integrated into the program in a manner that strengthens Medicare by improving the program’s ability to support modern disease management and prevention strategies. Many of

these strategies hold promise to both improve health outcomes and lower program costs.

PRESCRIPTION DRUG PROPOSALS BEFORE THE CONGRESS

The need to modernize the Medicare program to address the lack of prescription

drug coverage has become a major issue for the 106th Congress. Several types of

proposals for establishing a Medicare prescription drug benefit have been introduced. At this time, AARP has not taken a position on any of the proposals before

Congress. As these plans continue to be refined, we have reserved judgment until further questions can be answered. We have not attempted in this testimony to undertake an extensive review of all of the prescription drug proposals introduced and the

full range of questions that they raise. That essential step will require many more

hearings, close review by a range of experts, and careful assessment of the impact

of the proposed changes on beneficiaries, plans, providers, and the program itself.

However, we have tried to summarize the major types of policy approaches before

the Congress and the fundamental questions that must be answered about each.

President Clinton’s Proposal

The approach put forward by President Clinton requires Medicare to pay for 50

percent of beneficiaries’ prescription drug costs. This Medicare benefit would be

available to all beneficiaries, but would be voluntary. Benefit management would be

contracted out to private entities, such as pharmacy benefit managers (PBMs). This

approach would allow market forces to reduce drug prices for beneficiaries because

the contracted third parties could negotiate the same types of discounts from manufacturers and pharmacies for Medicare as they currently negotiate for health plans

and HMOs. The government would be distanced from the role of determining prices

under this approach. Additional financial assistance would be provided to low-income beneficiaries and financial incentives would be offered to employers to ensure

that they retain current retiree health benefits. The Administration has now also

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suggested a new catastrophic benefit, although the details have not been spelled

out.

While AARP is pleased that the President’s proposal includes prescription drug

coverage for all beneficiaries, details of his plan are forthcoming and there are still

unanswered questions about how a Medicare-based proposal would work. For instance:

• Will this prescription drug coverage be affordable to beneficiaries?

• Are the proposed benefit package and subsidy sufficient to attract a large number

of beneficiaries?

• How would the President’s new additional benefit to protect those beneficiaries

with extremely high drug costs work?

The Kennedy-Stark-Dingell bill takes a similar Medicare-based approach as the

President’s, but would provide a different and more generous benefit structure. Although the bill’s proposed benefit would include a deductible of $200, the beneficiary’s coinsurance would be 20 percent rather than 50 percent, as proposed by the

President. In addition, the Kennedy-Stark-Dingell bill would include a cap on the

benefit of $1700 and stop-loss protection after the beneficiary has $3000 in out-ofpocket prescription drug expenses. This proposal raises the following questions:

• What happens to beneficiaries after they have exceeded the benefit cap but before

they are eligible for stop-loss protection?

• Would beneficiaries support this type of benefit structure?

• Does this type of benefit meet the need of most current and future beneficiaries?

The Breaux-Frist Proposal

The approach introduced by Senators Breaux (D-LA) and Frist (R-TN) provides

some subsidy to all beneficiaries interested in purchasing prescription drug coverage. Unlike the President’s plan, this approach would not create a defined prescription drug benefit; rather, it allows entities, such as insurance companies or

health plans, to offer any type of benefit so long as the benefit is equal to a certain

actuarial value. Plans would compete by varying their drug benefit design.

AARP is pleased that the Breaux-Frist bill improves upon earlier versions of the

proposal in that it would include some form of subsidy for all beneficiaries who

choose to purchase a ‘‘high option’’ plan. However, we have several questions that

relate to our belief that the benefit must be affordable and avoid risk selection.

These questions include:

• Is the prescription drug benefit affordable? Is a 25 percent premium subsidy

enough to create a viable risk pool and make the benefit affordable for most

beneficiaries?

• How would insurers be prevented from ‘‘cherry picking’’ beneficiaries since the

drug benefit would be pegged to an actuarial cost and not to a particular benefit

design?

• What will be the effect on quality of care and on beneficiaries or program cost

of having a prescription drug that is administered separately rather than as

part of the rest of Medicare? Will this lack of integration lead to cost-shifting

or poorer quality care?

• Will prescription drug insurance that is offered through private entities be more

expensive for beneficiaries and for the Medicare program than a benefit administered by Medicare because Medicare does not have to make a profit, and has

lower administrative overhead costs?

• Will high-option stop-loss protection extend to the prescription drug benefit? How

would beneficiaries who have very high drug costs be protected?

The Bilirakis Proposal

Another approach, illustrated by Representative Bilirakis’ (R-FL) bill, is to create

a state-based approach for low-income beneficiaries, while expanding Medicare’s

benefits to include stop-loss protection so that the program would cover prescription

drug costs once a beneficiary’s annual out-of-pocket expenses reached a specified

threshold. This approach would rely on the states to develop mechanisms for reducing prescription drug costs for low-income beneficiaries. While AARP opposes a

Medicare prescription drug benefit for low-income beneficiaries only, the approach

of providing low-income drug assistance outside of the Medicare program deserves

further review. However, a state-based approach with accompanying Medicare stoploss protection raises the following types of questions:

• How will the state low-income drug assistance program work? Would all states

offer a low-income prescription drug program?

• What processes would be established for enrollment and outreach in the statebased low income prescription drug programs?

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• Would there be any incentives for Medicare+Choice plans to keep offering a drug

benefit or to offer wrap-around coverage?

• Would receipt of Medicare stop-loss protection be conditioned on the purchase of

private sector insurance?

The Allen Proposal

Another approach, reflected in Representative Allen’s (D-ME) bill, attempts to

lower prescription drug prices by limiting the prices that manufacturers could

charge beneficiaries. This approach does not involve the creation of a Medicare prescription drug benefit, but rather would lower drug prices by legislatively tying the

prices paid by retail pharmacies for drugs sold to Medicare beneficiaries to the best

prices paid by the government. Although it does not provide a Medicare benefit, the

Allen approach has helped focus attention on the inequity of prescription drug pricing and merits review. However, a prescription drug discount approach raises the

following types of questions:

• Will manufacturer discounts be passed on to Medicare beneficiaries?

• Will manufacturers engage in cost-shifting?

• Will a lower return on pharmaceuticals taken by beneficiaries discourage manufacturers from further research and development of drugs mainly used by older

Americans?

OPTIONS FOR MEDICARE REFORM

The above policy approaches for dealing with the high cost of prescription drugs

illustrate one challenge we face in modernizing Medicare. The President’s Medicare

reform proposal, the plan introduced in the Senate by Senators Breaux and Frist,

and proposals that will likely emerge from the House, provide opportunities for furthering debate about Medicare’s future. We urge the Congress to carefully examine

the different reform options and begin to answer some of the most critical issues

surrounding broad changes to Medicare, including:

• How, and to what extent, would Medicare’s long-term solvency be improved?

• Would fee-for-service Medicare remain an affordable option for beneficiaries of all

incomes?

• Would all beneficiaries—regardless of the area of the country in which they live—

have access to the same set of defined Medicare benefits?

• Would a prescription drug benefit be affordable and available to all beneficiaries?

• Would the level of the government’s contribution continue to assure adequate

choice for beneficiaries over time, without regard to where they live?

• How would beneficiaries be protected from high out-of-pocket costs?

• Would the entity responsible for administering Medicare be accountable to Congress and to beneficiaries?

• How would Medicare reforms be financed?

KEY PRINCIPLES THAT SHOULD GUIDE BROADER MEDICARE REFORM

As this Committee also examines the broader issue of reforming Medicare, AARP

urges you to consider the fundamental principles that, since Medicare’s inception,

have helped to shape it into such a successful program. We believe strongly that

these principles must be the basis of any viable reform option.

Defined Benefits Including Prescription Drugs

All Medicare beneficiaries are now guaranteed a defined set of health care benefits upon which they depend. A specified benefit package that is set in statute is

important for a number of reasons. First, it assures that Medicare remains a dependable source of health coverage over time. Second, a defined benefit package

serves as an important benchmark upon which the adequacy of the government’s

contribution toward the cost of care can be measured. Without this kind of benchmark, the government’s contribution could diminish over time, thereby eroding

Medicare’s protection. Third, a benefit package set in statute reduces the potential

for adverse selection by providing an appropriate basis for competition among the

health plans participating in Medicare. And finally, a defined benefit package provides an element of certainty around which individuals, employers, and state Medicaid programs may plan.

As was laid out earlier in this statement, because prescription drugs are central

to the delivery of high quality health care, Medicare should be like most other

health insurance plans and include prescription drugs as part of Medicare’s defined

benefit package offered by all participating plans—including traditional fee-for-service.

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Adequate Government Contribution Toward the Cost of the Benefit Package

It is essential that the government’s contribution or payment for the Medicare

benefit package keep pace over time with the cost of the benefits. Currently, payment for traditional Medicare is roughly tied to the cost of the benefit package. If

the government’s contribution were tied to an artificial budget target and not connected to the actual cost of the benefit package, there would be a serious risk of

both the benefits and government payment diminishing over time. The effect of a

flat government payment—regardless of the plan cost—could be sharp year-to-year

premium and cost-sharing increases for beneficiaries. It could also mean significant

differences in what beneficiaries would have to pay for different Medicare plans.

Out-of-Pocket Protection

Changes in Medicare financing and benefits should protect all beneficiaries from

burdensome out-of-pocket costs. Medicare beneficiaries age 65 and over, spent on average, about $2,430—nearly 20 percent of their income—out-of-pocket for health

care expenses in 1999, excluding the costs of home care and long-term nursing care.

In addition to items and services not covered by Medicare, beneficiaries have significant Medicare cost-sharing obligations: a $100 annual Part B deductible, a $776

Part A hospital deductible, 20 percent coinsurance for most Part B services, a substantially higher coinsurance for hospital outpatient services and mental health

care, and significant coinsurance for skilled nursing facility care and very long hospital stays.

AARP believes that Medicare beneficiaries should continue to pay their fair share

of the cost of Medicare. However, if cost-sharing were too high or varied across

plans, Medicare’s protection would not be affordable, and many beneficiaries would

be left with coverage options they might consider inadequate or unsatisfactory.

Viable Fee-for-Service

Medicare beneficiaries must continue to have access to a strong and viable feefor-service option. Managed care is not yet established as a fully satisfactory choice

for many beneficiaries. In addition, many beneficiaries live in areas of the country

where managed care plans are not available or likely to become available. Without

an affordable fee-for-service option, these beneficiaries could end up paying as much

or more out-of-pocket for health care coverage that does not meet their needs.

Protecting the Availability and Affordability of Medicare Coverage

Medicare should continue to be available to all older and disabled Americans regardless of their health status or income. Our nation’s commitment to a system in

which Americans contribute to the program through payroll taxes during their

working years and then are entitled to receive the benefits they have earned is the

linchpin of public support for Medicare. Denying Medicare coverage to individuals

based on income threatens this principle. Similarly, raising the age of Medicare eligibility would have the likely affect of leaving more Americans uninsured. Thus, in

the absence of changes that would protect access to affordable coverage, AARP opposes efforts to raise the eligibility age for Medicare. Analogies to Social Security’s

increasing age of eligibility simply do not apply. Social Security’s early retirement

benefits—though actuarially reduced—start at age 62, and most retirees today begin

to collect benefits at age 62 not at age 65.

Quality of Care

Medicare beneficiaries have come to depend upon quality care in Medicare. Quality standards have been a hallmark of the program and have often served as a

model for the private sector. Systematic data collection and analysis, careful quality

monitoring, as well as new techniques for promoting quality outcomes, must remain

a part of any reformed Medicare system.

Administration of Medicare

Effective administration of the program remains essential. The agency or organization that oversees Medicare must be accountable to Congress and beneficiaries for

assuring access, affordability, adequacy of coverage, quality of care, and choice. It

must have the tools and the flexibility it needs to improve the program—such as

the ability to try new options like competitive bidding or expanding centers of excellence. It must ensure that a level playing field exists across all options; modernize

original Medicare fee-for-service so that it remains a viable option for beneficiaries;

ensure that all health plans meet rigorous standards; and continue to reduce waste,

fraud and abuse in the program.

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Financing

Medicare must have a stable source of financing that keeps pace with enrollment

and the costs of the program. Ultimately, financing sources will need to be both

broadly based and progressive. Additionally, because health care costs are rising

faster than productivity, AARP supports using an appropriate portion of the onbudget surplus to secure Medicare’s financial health.

CONCLUSION

The Medicare program needs to be ready to meet the unique challenges it faces

now and in the future. Foremost among the challenges is ensuring that, even as the

program adjusts to ensure its future financial soundness, it must also adjust to keep

pace with the rapid advances in medicine. Therefore, AARP believes that an affordable Medicare prescription drug benefit that is part of Medicare’s defined benefit

package and available to all Medicare beneficiaries is essential to any Medicare reforms.

How to provide Medicare beneficiaries with affordable prescription drugs is a huge

challenge. AARP urges all stakeholders—government, industry, and consumers—to

engage in a serious debate on the merits of the full range of approaches. The success

of any drug benefit proposal as well as broader changes to Medicare depend on a

clear understanding—on the part of the public and policy makers alike—of the

changes that are being contemplated. This will require not only extensive dialogue,

but also a thorough distributional analysis of how the proposed changes would affect

the full range of current and future beneficiaries.

If legislation is pushed through too quickly, before there has been a thorough examination of the effect on beneficiaries and the program, and before there is an emerging ‘‘public judgment’’ about the changes, this would be a very serious mistake. In

such a circumstance, we would be compelled to alert our members to the dangers in

such legislation and why we could not support it.

We thank you for your efforts to examine proposals to establish a prescription

drug benefit for Medicare beneficiaries. AARP looks forward to continuing to work

with members of this Subcommittee and the Congress to advance the debate over

prescription drug coverage, and to carefully explore the best options for securing

Medicare’s future.

Mr. BILIRAKIS. Thank you, Dr. Braun. Thank you both for your

testimony. Of course, Dr. Braun, it is always a pleasure to welcome

a fellow Floridian before the subcommittee.

As a Representative of one of the oldest districts in the country

and a senior myself, I am particularly sensitive about the struggle

many Medicare beneficiaries face in obtaining the medicines they

need. I have said repeatedly that our most vulnerable seniors deserve help right now. Dr. Braun, your written statement included

a caution that I would summarize as haste sometimes makes

waste, and I certainly agree with you.

Over the past couple years, members of the Medicare Commission, administration officials, experts in the private sector, and

many Members of Congress have given considerable thought to

these issues, but I believe that we must act. I still feel that we

must act this year to ensure that no senior citizen is forced to

choose between buying groceries and filling a prescription. And, Dr.

Braun, you clearly said it is a huge challenge.

My fundamental question to both of you is, yes, we need to reform Medicare, and yes, we need to do it as quickly as we can, but

we want to get it right. I ask you, if Congress and the President

do not reach an agreement on broader reform to protect and improve Medicare this year, which almost certainly would include

prescription drugs, the question is, don’t we have a moral obligation to help the poorest and the sickest beneficiaries now, rather

than just wait until we can finally get around to reform? And I

would ask Mrs. Lewis if you have an opinion——

Mrs. LEWIS. I would totally agree with that.

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Mr. BILIRAKIS. Do you have any explanation that you would like

to offer in that regard?

Mrs. LEWIS. No, I really don’t.

Mr. BILIRAKIS. Dr. Braun?

Ms. BRAUN. Yes, I certainly think we need to help our low-income beneficiaries a great deal, but you and I both realize that

middle income beneficiaries actually are having a great deal of

trouble also, particularly if they have high drug costs. The median

household income, not individual income but household income of

those over 65 is $20,000 a year, which I think all of us would have

difficulty getting along on. And if they have high drug costs, even

though they are middle income, they really have a big problem.

I would hope that we might be able to pass something that would

be available for all beneficiaries, that could be affordable, and also

that could be voluntary so it doesn’t take away from anything that

people have, like Mrs. Lewis is very, very fortunate with the coverage that she has. And I certainly realize that we need to work

cost containment into the situation, and we also need to work quality into the situation. There are just a lot of principles that we are

going to need to follow. And I don’t think, while a low income benefit, not in Medicare because Medicare really should be the same

for all its beneficiaries, but even outside of Medicare, our ideal, it

could be done certainly, as I know the chairman has proposed.

Mr. BILIRAKIS. What we have proposed, of course, is not just the

poorest, the low income beneficiaries outside of the scope of

Medicare——

Ms. BRAUN. Right, right.

Mr. BILIRAKIS. [continuing] people who are Medicare beneficiaries, but we have also proposed something to help the sickest

because of the stop-loss provision. Dr. Braun, in an ideal world, if

you could satisfy the quality situations and address the areas that

Dr. Coburn and so many others have mentioned, and you had no

problems with the finances—and Medicare program certainly has

a lot of problems, financially and otherwise—you could do something equally for all beneficiaries, including Ross Perot and so

many others in that category. I certainly don’t put you in that

category——

Ms. BRAUN. No. I wish.

Mr. BILIRAKIS. [continuing] but you are not in the lowest economic strata.

Ms. BRAUN. No, I am not in the lowest.

Mr. BILIRAKIS. Don’t we have a moral obligation, if we have a

shortage of resources, to help at least the sickest people and the

poorest people now, and then hope that eventually we might get to

the point where we are able to reach the goal that the AARP and

Mr. Waxman and others have mentioned of doing everything equally across the board for all Medicare beneficiaries?

Ms. BRAUN. I really think the need is there for all Medicare

beneficiaries. That is the problem.

Mr. BILIRAKIS. For all, equally? An equal need?

Ms. BRAUN. No. Low income would certainly need subsidies, and

they do have a tremendous need, and I can understand the chairman’s thoughts on that subject, but I really do think there is a

need across the board for all beneficiaries. And I think with the

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chairman’s thoughts, doing it outside certainly is better than trying

to do something in Medicare which would only be available for certain people. But I think we have a lot of concerns about what

would the States do with this, how many would step up to the

plate, and——

Mr. BILIRAKIS. Well, we don’t know, but they seem to be moving

toward that. I understand that the National Conference of State

Legislatures has put that at the top of their agenda.

Well, my time has long expired. Mr. Waxman?

Mr. WAXMAN. Thank you, Mr. Chairman. I am pleased to hear

from the two witnesses today.

Dr. Braun, as I understand your testimony, you don’t disagree

with Mrs. Lewis. If she has good coverage, you want her to stay

with her coverage.

Ms. BRAUN. Absolutely.

Mr. WAXMAN. She shouldn’t have to be pushed into something

else if she doesn’t want to.

Ms. BRAUN. Absolutely. I think that is wonderful. As I say, in the

county above me all the managed care has pulled out. There isn’t

any. In my county one has pulled out. Another one which had most

of the managed care people went from zero to $93 a month for their

premium. So there are real, real problems, and I think our rural

areas will never really have managed care, so we do need to think

in some other kinds of terms. Let the people who have coverage

keep it, but the people that don’t have it, we have got to think

about.

Mr. WAXMAN. Well, not all managed care plans have coverage.

Ms. BRAUN. They are cutting down on it.

Mr. WAXMAN. But a lot of people don’t want to be in managed

care, and if they stay in Medicare fee-for-service, which most seniors do, they ought to be able to have some help with the costs of

their prescription drugs.

Now, a lot of people are saying that we ought to only help people

150 percent of poverty and below. I guess they are compassionate

conservatives because they care about low income people.

Ms. BRAUN. That is good to hear.

Mr. WAXMAN. It is good to hear, sort of surprising in some cases,

but it is good to hear. But what is wrong with that? Do we have

a problem for people above 150 percent of poverty? After all, just

by the way, 150 percent of poverty for a married couple is $17,100.

Ms. BRAUN. That is right.

Mr. WAXMAN. For singles it is $12,750. That sounds pretty low,

and I know there are people above that that are having problems

with prescription drugs.

Ms. BRAUN. That is very true. That is very true. There are a lot

of people having problems with prescription drugs, particularly if

they have rather high costs, and that risk needs to be spread. However the program is set up, we need to pull in, make it possible for

people to come into the program so that it is worthwhile for the

people who don’t have problems as well as for the others.

Mr. WAXMAN. If it is going to be voluntary, it has got to be a program that is affordable——

Ms. BRAUN. Right.

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Mr. WAXMAN. [continuing] and to be affordable, you have got to

bring in lots of people to participate.

Ms. BRAUN. That is right.

Mr. WAXMAN. Could anybody imagine what the reaction would be

among your membership in AARP if we said Medicare was only

going to be for people 150 percent of poverty and below?

Ms. BRAUN. No. I would hope that that day will never come.

Medicare is not a means-tested program. It is an insurance program that people have paid into, even Ross Perot.

Mr. WAXMAN. Even Ross Perot has paid in, and everybody pays

into Medicare, and then when they are eligible, they are entitled

to it.

Ms. BRAUN. That is right.

Mr. WAXMAN. And if they are entitled to have insurance, insurance ought to cover prescription drugs.

Ms. BRAUN. That is right. I would agree absolutely. In today’s

medicine it doesn’t make any sense not to have prescription drug

coverage.

Mr. WAXMAN. What do you think of the argument that we

shouldn’t provide prescription drugs until we have reformed Medicare? I suppose people could then say that if you haven’t reformed

Medicare, you shouldn’t do that unless you reform the whole health

care system. Are we just hearing arguments that will keep us from

doing anything?

Ms. BRAUN. That might be true. I do think it would be ideal, if

we could do it, to do it within the context of all of Medicare, but

I think it may be a situation that we really need to move on and

we won’t be able. It will take us a while to move on total Medicare

reform. I think particularly it would fit better into the whole program because the financing then could be considered for the whole

program rather than just for a small program.

Mr. WAXMAN. I have the impression that some of the people that

are compassionate conservatives because they want to cover low income people, have more compassion about the pharmaceutical companies, making sure they can charge whatever they want for prescription drugs. If only low income people were covered, and of

course we have the very low income now under Medicaid eligible

for prescription drug coverage, what will it mean for drug companies? Won’t they just continue to be able to discriminate against

the elderly and charge them higher prices?

Ms. BRAUN. It would sound so, but certainly no matter what kind

of system is set up, it needs to have cost containment and there

need to be—some of the cost containment things that are now in

the private sector need to be introduced in order to have cost containment across the board. I think that is very necessary.

Mr. WAXMAN. What about this argument that Medicare drug

benefits are going to destroy research and development for new

drugs, and therefore if we want new drugs, we shouldn’t provide

elderly people with Medicare coverage for their prescription drug

costs?

Ms. BRAUN. We really haven’t seen any evidence of that happening in legislation that has come about in the past, and I certainly think we need to be sure that the research is still in place,

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ceutical companies. It would be hard to think that they wouldn’t

try to find new drugs because that is where the profit is.

Mr. WAXMAN. A lot of my Republican colleagues pointed out, and

I think they are absolutely right, a lot of that money that the drug

companies get goes into marketing. They are doing direct advertising on television, and they have other direct marketing costs.

Some of those marketing costs in some companies rival what they

are spending on research and development. If they had to cut back,

maybe they will cut back on some of the marketing and continue

the life flow of new drugs that the research and development would

bring.

Ms. BRAUN. Could be.

Mr. WAXMAN. Thank you, Mr. Chairman.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Greenwood?

Mr. GREENWOOD. Thank you, Mr. Chairman.

Let me first say to Mrs. Lewis that I am delighted that you can

walk at a brisk pace for 45 minutes. That is more than most Members of Congress can do. But it shows us the increased vigor that

today’s elderly have. My parents are 78 years old, and recently my

mother and father and I jumped out of an airplane together, went

skydiving.

Mrs. LEWIS. The word is determination.

Mr. GREENWOOD. We come from a crazy family.

I would like to address a question to Dr. Braun. In your testimony, I think that the following is a direct quote. You say, ‘‘If legislation is pushed through too quickly, before there has been a thorough examination of the effect on beneficiaries and the program,

and before there is an emerging public judgment about the

changes, this would be a very serious mistake. In such a circumstance, we would be compelled to alert our members to the

dangers in such legislation and why we could not support it.’’

And I commend you for recommending to the Congress that we

take a very deliberative approach to this very, very critical issue.

In fact, I think in response to a question you said that we need several more hearings, many more hearings to work this out, and that

may be the case.

That being so, there is an effort afoot in the House to discharge

from committee consideration the Allen-Waxman bill, which would

essentially say to this subcommittee and to the full Commerce

Committee and to our counterparts on the Ways and Means Health

Subcommittee and their full committee, ‘‘Stop thinking about it,

stop deliberating, stop bringing witnesses from the AARP or anyone else forward to really hone your judgment on this.’’ Just yank

the bill out of committee without consideration, wipe your hands of

it, and throw it out on the floor for what I think would be a very

politicized vote and not worthy of the greatest deliberative body on

earth.

Having said all that, would you then agree that that would be

a precipitous thing to do, and meet your test of pushing something

through too quickly?

Ms. BRAUN. Well, I am not all that savvy on the politics end of

the situation, but I think we certainly stand with our judgment

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39

thing that is being suggested should be hindered. And we do need

a chance to analyze bills and really see what their impact is going

to be on beneficiaries, and that is really all I can say about that.

Mr. GREENWOOD. Okay. Let me ask you another question, if I

could, Dr. Braun. AARP’s second largest source of revenue, next to

membership dues, is the sale of Medigap insurance. As you know,

in 1990 Congress required that seniors would have to buy down

their deductibles and purchase questionable items such as foreign

travel insurance before they are allowed to buy prescription drug

coverage. Moreover, the drug coverage that is offered has 50 percent co-insurance and low benefit caps.

Do you think Congress ought to consider changing the Medigap

law and allowing AARP and others to sell a product that has a better value for seniors? We believe right now that Medigap is a good

buy for seniors.

Ms. BRAUN. I think that whole situation needs to be looked into,

Congressman, because I think it is questionable. Those Medigap,

first of all, not everybody can get them because they are all medically underwritten, so once you get something wrong with you and

need the medicine, you can’t get them. But even when you have

them, they are expensive. They are all capped, they have 50 percent co-payments, and the premiums are very expensive. So they

really perhaps are not that good a buy, although some seniors want

to feel that kind of security, and so they hold onto them if they can

afford them.

Mr. GREENWOOD. Wouldn’t you say that that speaks to the need

to take a relatively comprehensive look at the structure of Medicare, including Medigap, before we just sort of glom onto a Medicare prescription drug benefit without looking at the foundation of

Medicare that would sit below it?

Ms. BRAUN. I think that is one of the problems of doing it separately. It would be much easier to look at the whole situation, and

certainly nobody would welcome any more than we do if Congress

would find a way that we didn’t need Medigap insurance, that

there wouldn’t be all that much gap, so that people would not need

that extra insurance. It does seem kind of strange that seniors

have to have one insurance program, and then they have to have

another insurance over that to fill in gaps. It doesn’t make too

much sense.

Mr. GREENWOOD. Thank you very much.

Ms. BRAUN. So it would work out better to do it with the whole

program, but on the other hand, perhaps it will be possible to do

it without doing the whole program.

Mr. GREENWOOD. It will be possible, but maybe not advisable.

Thank you very much for your answer to my question.

Mr. BILIRAKIS. I thank the gentleman.

Mr. Pallone, to inquire?

Mr. PALLONE. Thank you, Mr. Chairman.

I wanted to ask Dr. Braun a couple of questions. I guess my biggest concern here, and I expressed it in my opening statement, is

that we will, or at least on the Republican side that they will continue to look to target lower income people and not have a broadbased benefit under Medicare. And you certainly, Dr. Braun, exVerDate 11-MAY-2000 13:23 Jul 12, 2000 Jkt 064041 PO 00000 Frm 00043 Fmt 6633 Sfmt 6602 E:\HEARINGS\62971 pfrm07 PsN: 62971
40

pressed some of the concerns about that, but I just wanted to dwell

if I could on two aspects of that that bother me.

First of all, we know that when we are dealing with any kind of

insurance, from the point of view of the finances, the broader the

insurance pool, the better off we are. And you, you know, obviously

mentioned that, and I guess there are two parts to my question.

One is if you would maybe elaborate on that a little more, because

I think it is very important that this be a very broad pool.

The other thing, though, is political, and I know you said you are

not so much savvy about the politics, but I am going to venture to

say as a politician that my concern about just addressing the problem of the lower income is also based on the fact that then what

happens is you don’t have the political support, if you will, that you

have for a broad-based benefit that covers everyone.

In other words, one of the reasons why I think that Medicare is

so strong and that any effort to try to cut back or do anything that

might damage it, we have such a huge reaction in the public, is because everybody gets coverage. All seniors get coverage under

Medicare. And if you start to make it, any aspect of it, just low income based, you lose the political support for Medicare which I

think is very important if we are going to continue to have it. And

of course AARP is a grand example of that because a lot of your

members, you know, they can be poor but a lot of them are even

wealthy, I would venture to say.

So I just wanted you to comment on those two aspects, one, the

need for a broad insurance pool, and also the political aspect, that

we don’t want to undermine the support of the public for a program

if it becomes need-based, if you would. And you don’t have to, but

I am just asking you to.

Ms. BRAUN. No, I think as far as the insurance is concerned, any

kind of insurance depends on having a very broad risk pool, so you

have some people who aren’t using and other people who are. We

all know we carry fire insurance for our houses, and we hope the

houses don’t burn down, but there are enough people carrying it so

that it is not terribly expensive and they can pay for it when it

does burn down.

And we need the same sort of thing with the insurance for prescription drugs. I think it is very important that whatever is done,

we don’t put a measure in Medicare which is just for low income.

I think it is very, very important to keep the original plan of Medicare, which was that it would be a defined benefit and the benefits

would be available for everybody who is eligible for Medicare. That

is really, really important, I think.

As far as the support, political support for the situation, that

may have some value, as you are saying. However, I think the need

is so strong in the middle income group that if we simply do the

low income, I think you are still, Congress is still going to feel the

pressure that people need coverage, and very especially when they

don’t have any other place to get it.

Mr. PALLONE. You know, you also talked, there was a recent

AARP study on seniors’ out-of-pocket costs for drugs, and it talked

about the problem of access to affordable drugs cutting across all

beneficiaries and not just the low income.

Ms. BRAUN. Right.

41

Mr. PALLONE. Even beneficiaries with current drug coverage are

not insulated, as you mentioned, from high out-of-pocket costs. For

example, those with Medigap or Medicare+Choice coverage still

may pay significantly out of pocket. Could you comment on that?

Ms. BRAUN. Well, there are other out-of-pocket costs where it is

not just prescription drugs. That is just a part of it. I think that

the largest part actually is the premiums, but there are—anything

that is not covered by Medicare, the seniors are going to have to

get separately, and glasses and hearing aids, all of those things are

not covered and they can be very expensive, so——

Mr. PALLONE. I mean, the point is, we are getting a situation,

like with Medicare+Choice, where not only are premiums being

charged where they weren’t before, but the out-of-pocket costs, you

know, co-payments and all those other things are going up.

Ms. BRAUN. Yes. They are capping the drug costs in a lot of cases

where they didn’t cap them before——

Mr. PALLONE. I think that is why——

Ms. BRAUN. [continuing] and the 50-50 costs for them also adds

to the costs.

Mr. PALLONE. Someone told me that there is almost no plan anymore than doesn’t provide some premium, you know, that the option of not having premium has almost ceased to exist.

Ms. BRAUN. Yes, almost, that is very true.

Mr. PALLONE. Thank you.

Thank you, Mr. Chairman.

Mr. BILIRAKIS. Thank you. I thank the gentleman.

Dr. Coburn, to inquire?

Mr. COBURN. Thank you.

Mrs. Lewis, thank you so much for sharing your medical history

with us. I think it is very important. I have a lot of patients very

similar to you, and they are really a joy to be around.

I want to ask you a question. Your osteoporosis is measured by

getting a bone densitometry. How often do you get that test?

Mrs. LEWIS. The past several years I have had a bone density

scan once a year. However, I had a fall and my pelvic bone fractured not too long ago, and at that time, when I got out of the hospital and recovered up to a certain point, we then had another one,

but that was a separate item.

Mr. COBURN. But since you have been on your new medicine,

your bone density has not decreased, it has actually increased.

Mrs. LEWIS. It has, minimally——

Mr. COBURN. Minimally.

Mrs. LEWIS. [continuing] but it has increased instead of decreased.

Mr. COBURN. I am making this point, is she has been on an effective medicine that was proven once that it was working, and yet

Medicare paid for another bone densitometry study each year.

Why? Not medically indicated, just it was done, and it was done

because it was out there. Once a patient starts achieving a reversal, if they do, and not all do, and once you have established that

fact on a medicine, you don’t need to do another test.

My point being, is we need to look at all of Medicare because one

of the most abused tests out there today is a bone densitometry

test, and it is being done in doctor’s offices across the board, and

42

people are getting charged for it, Medicare is paying for it, and we

are taking money out of the Trust Fund to pay for it, and yet it

is not necessarily indicated. And so the point is, is there is money

going out of Medicare for something that is not necessary, where

that money could be directed toward drugs.

I would also raise another point, and that is, Mr. Pallone has

sponsored a bill that focuses on subsidizing low income and uses

private coverages, the SPICE bill. So, you know, I think it is important that we keep things above board.

I also wanted to make one other point, and I wanted to ask Dr.

Braun. My Medicare, I mean my AARP number is DOLCA027, and

I happen to be a member of AARP, and the question I would have

for you, whatever we do on drugs, who should pay for it?

Ms. BRAUN. I think that has to be——

Mr. COBURN. What is AARP’s position on who should pay for

that?

Ms. BRAUN. I think it has to be shared, and certainly the beneficiaries need to share in that. I think everybody needs to get together, the providers, the drug manufacturing companies, everybody needs to get together, the government, to figure out how we

can do this in a fair kind of way that will make it affordable to all

beneficiaries.

Mr. COBURN. Do you think your grandchildren and mine should

pay for our drugs tomorrow?

Ms. BRAUN. The ones who are working now? I hope that——

Mr. COBURN. Yes, that they should pay for our drugs tomorrow.

Ms. BRAUN. I hope that they are paying for what they will get

eventually. It is being used certainly at the present time, but I

really see that as an insurance, and insurance that they are promised health benefits when the time comes that they will retire.

Now, goodness knows by that time how much it is going to cost.

Mr. COBURN. Well, let me interrupt you, because the demographics don’t support that at all. The demographics do not support

that even with the benefits that we have today, that our children

can continue to pay the rate at what they are paying and come

anywhere close to supporting the baby boom generation, of which

I happen to be part of. And so what I would like to know is, what

is AARP’s position on who should pay the additional cost? There is

going to be an additional cost. Everybody agrees to that. Who

should pay? Should our children and grandchildren pay for it?

Where is the money to come from?

Ms. BRAUN. I think, as I say, I think the present day beneficiaries certainly need to do their fair share with the situation

where they can afford to. The low income people can’t. I certainly

think that the government, we have an on-budget surplus fortunately now——

Mr. COBURN. No, we don’t. Now, I made that point in my opening

statement. There is no on-budget surplus. Every bit of the money

in the surplus for last year, this year and next year comes from excess Medicare payments, every penny. In other words, maybe we

ought to think about spending less money on other programs so we

can meet the obligations of our seniors. Is that a possible solution?

43

Ms. BRAUN. That is a very difficult solution, depending on what

programs. And I am sure no matter what program you decide, they

are going to say you can’t.

Mr. COBURN. How about the 110,000 IRS employees?

Ms. BRAUN. What?

Mr. COBURN. How about the 110,000 IRS employees? How about

the 100,000 Department of Agriculture employees? Is there any

room for us to gain efficiency in the Federal Government so we can

move resources to help our seniors with their drugs?

Ms. BRAUN. I would hope maybe there is. I am sure I have no

idea whether you need more or less——

Mr. COBURN. I guess one of the things I would like to see is the

AARP be a little more imaginative on where the money ought to

come from to help our seniors.

I see I am out of time. I want to thank you for your testimony.

I did not mean to be combative. I appreciate what you all do.

Mr. BILIRAKIS. Thank you, Dr. Coburn.

Ms. DeGette, to inquire? We will go down the line. The gentleman from Michigan?

Mr. STUPAK. Thank you, Mr. Chairman.

There has been a lot of discussion about the discharge petition,

and I don’t want that to be left like somehow we are doing this evil

process to get this bill to the floor. A discharge petition, and I

haven’t been here as long as a lot of people, maybe 8 years, has

never been successful yet. We have never had 218 people sign it.

Whenever you get close to 200, the majority party, in this case

the Republicans, would then bring some type of watered-down bill

or something that they would like, and that would be the answer

to stem the 218 votes from a discharge petition being successful.

So in order to have a fair and open, honest debate, the only place

we are going to get a chance is these committees.

And so this discharge petition, after 2 years a lot of us are frustrated. We have been on this process for over 2 years, trying to get

this legislation or this issue before the Congress. So while maybe

not successful in coming to the floor the way we would like to see

it, with a full, honest, fair debate, at least through the discharge

process we get the issue out front and you can see we even have

a hearing.

So I think the discharge petition and those people who had the

courage to sign it are doing the right thing to get this debate moving, because I really can’t understand why the drug companies, and

it is not the pharmacists but the drug companies, why does a senior who has no drug coverage have to pay twice as much for the

same prescription? I think that is unconscionable, I think it is a

terrible thing we do, and we have to stop this pricing discrimination by the pharmaceutical companies.

Having said all that, having said all that, doctor, I would like to

follow up a question that Mr. Pallone was asking you about the access and out-of-pocket expenses and things like that. Older seniors

and sicker seniors are more likely to have higher drug costs. In

fact, I think it is like most seniors take 2.4 percent more, 2.4 times

more drugs than people under 65. But while certain seniors are

more likely to have high drug costs, almost any senior could find

themselves with enormous drug bills after an unexpected illness.

44

This fact points to the need for a Medicare drug benefit that is

available to everyone, not just certain groups of senior citizens.

Dr. Braun, judging by what you have told us, it seems that the

only way to guarantee security for those in need is to provide a

benefit for all beneficiaries, because I believe everyone is getting

older, illness can come at any time, requiring expensive drugs, and

even with coverage, they have limited coverage, as you have indicated. Would you agree that the best way to proceed is with a universal benefit, be it 55-up or 65-up? Would you agree that the best

way to benefit is a universal benefit for all seniors?

Ms. BRAUN. Yes. I think AARP has stated that we really feel that

it should be available for all Medicare beneficiaries, but also that

it should be voluntary so that people can keep what they have if

they want to keep what they have.

Mr. STUPAK. And if it is voluntary, do you have any, have you

done any studies or anything that would indicate what percentage

of your seniors would participate in a benefit like this?

Ms. BRAUN. I think it is going to depend on how it is set up. That

is the problem at the present moment, and that is what we are

going to need to look at, why these things need more analysis, because we really need to see what the impact is going to be on the

beneficiary, and then we can find out from our members where

they stand or how they feel about that.

Mr. STUPAK. And I apologize if this question has been asked before, but the three plans that are floating around right now, the

President’s proposal, the Stark bill which would make it part of

Medicare, and of course the Allen bill which would stop the price

discrimination from the pharmaceutical companies, of those three

bills, has your organization taken a position on any one of those

three?

Ms. BRAUN. No, we haven’t taken a position on any of the bills

because we really think that they need more analysis. We have

questions on each one of the bills that we really need answered,

and therefore we are not in a position to take a position at the moment.

Mr. STUPAK. With your organization, have you prioritized this as

one of your priorities for this Congress, or have you prioritized the

issues?

Ms. BRAUN. We are certainly very hopeful that it will be possible,

but it does have to—you know, it does have to be done right, as

the chairman said.

Mr. STUPAK. By ‘‘have to be done right,’’ does AARP have any

kind of a position paper that they would like us to study or look

at?

Ms. BRAUN. Well, I think you have the principles that we have

set up in the testimony, and those are the things by which we are

judging each one and from which we elicit questions that we feel

are not answered in the particular bill.

Mr. STUPAK. Other than the testimony, there is no other position

paper or anything like that available from AARP?

Ms. BRAUN. Not that I know of, but I will check that out for you.

Mr. STUPAK. Thank you.

Mr. BILIRAKIS. Please summarize, Bart. Your time is up.

Mr. STUPAK. Thank you. I will yield back.

45

Mr. BILIRAKIS. All right. Thank you.

Mr. Bryant?

Mr. BRYANT. Thank you, Mr. Chairman, and I again thank the

panel for its excellent testimony.

What I hearing coming across from the other side of the aisle

about this discharge petition, people around Washington that have

been here longer than I have, and many on the other side have

been here much longer than I have, and I think everybody understands what is going on with the discharge petition. It is a very effective tool to use politically to highlight an issue, and certainly

something that was done I am sure very often 5 years ago, before

the Republicans took over.

And it can be used effectively, as I said, politically and also to

appear legislatively to put emphasis on a point, make a point, I

guess, but it has not been a very successful one in bringing bills

out of the House. Again, I can only speak for the last 5 years that

I have been here, but I am sure there was not much success when

the Republicans tried the same tactic when the Democrats were in

control for the 40 years or so before that.

So let’s just lay that on the table, and I think go back to the idea

that this is a very important issue and one that no one, neither

side I think really wants to be ramrodded or pushed too quickly

into trying to achieve a solution, which we all want to do. Medicare

is a very important piece of legislation I think that has been a success, and when we start talking about adding to it, which we all

think is necessary here with a drug benefit, we want to do it right.

I think the panel agrees, and I am sure everyone in this room

agrees to that. So let’s don’t, in the interest of politics and because

this might be a good campaign issue in November to help retake

control of Congress or help keep control of Congress, let’s don’t

rush to a judgment, if you will, in this case.

We hear something about price controls. I think some of the legislation that has been offered in effect amounts to price controlling,

and I think that most of us here understand that does not work

very effectively, and certainly in this environment of prescription

drugs has the potential to really chill the research and development. The drug that Mrs. Lewis testified about that has so greatly

helped her, that could—no telling how many drugs that are like

that out there right now, yet to be discovered or that are in the

pipeline of being discovered, that could be affected by such measures as price controls.

But I guess in the end I did want to ask Mrs. Lewis a question

about your particular case. You have testified, I think, that your

drug bill averages about $600 a year. Do you know how much of

that actually comes out of your pocket, or is that what you pay out

of your pocket?

Mrs. LEWIS. That is what I pay out of my pocket.

Mr. BRYANT. So your total drug bill is higher than the $600?

Mrs. LEWIS. Yes. There are other things that occur from 1 year

to another. That means other prescriptions, but it is not those that

I take every week.

Mr. BRYANT. That would be your premium combined with any copayments you have——

Mrs. LEWIS. Right.

46

Mr. BRYANT. [continuing] that would total about $600?

Mrs. LEWIS. Exactly.

Mr. BRYANT. The insurance company picks up, I guess, a larger

portion of your drug, prescription drug bill?

Mrs. LEWIS. Yes, I am sure they do. It is a lot more.

Mr. BRYANT. Well, the reason I was drawn to that $600 figure

is because that was very close to the example that I used in my

opening statement in alluding to the President’s proposal that is on

the table.

Mrs. LEWIS. It wasn’t taken from there.

Mr. BRYANT. Right. Well, I wanted to graphically use you as another example of that, realizing that the President’s bill is not necessarily going to be one to pass out of here, and realizing that it

is not mandatory; that, you know, whatever comes out probably is

going to be optional.

But whatever comes out, whether it is the President’s bill or

something else, is going to kind of set the standard, because I think

what we see is the private sector will eventually evolve around

maybe to where the government would be in this Medicare benefit,

and you might have people dropping their coverage for their retirees so they can go to the government program.

So what we pass out of here realistically could set the standard,

and I am still concerned about the President’s bill where it would

cost, on that average of $600 a year, it would actually cost a person

more money to be on that program when you add up the premium

of about $302 a year, together with a 50 percent co-pay on every

prescription drug they buy. And at this point it doesn’t seem to

have a stop-loss provision. I know he has talked about adding some

dollars to this plan, but not really defining yet, to my knowledge,

what type of stop-loss or ceiling he would set where you wouldn’t

have to pay anything beyond that.

But it is an expensive plan, and I think as the American people

learn about the President’s plan, they are not going to be happy

with it. And I still think that we as a Congress can simply do better, and I think that is the purpose of this hearing, is finding out,

listening to what you have to say so we can do a better job than

that, than his plan.

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. BRYANT. And I would yield back.

Mr. BILIRAKIS. Thank you, Mr. Bryant.

Mr. Dingell, to inquire?

Mr. DINGELL. Thank you, Mr. Chairman.

Mrs. Lewis, welcome. Thank you for being here. I am not clear

from your statement. Are you for or against having prescription

pharmaceuticals covered by Medicare?

Mrs. LEWIS. I think it should, but I don’t know where it stops.

I don’t know what the extent of it would be.

Mr. DINGELL. I see. Now, you haven’t told me yet whether you

are for or against. You say you think it should be but you don’t

know where the expense stops. That last part of your statement

doesn’t mean that you are against covering prescription pharmaceuticals under Medicare, does it?

Mrs. LEWIS. To tell you the truth, I hesitate to give an answer

to that because I don’t feel I know enough.

47

Mr. DINGELL. Okay, so you don’t know whether you are for or

against covering prescription medications in Medicare?

Mrs. LEWIS. Well, I prefer to have Medicare.

Mr. DINGELL. I still don’t understand what you are telling me.

There are a lot of senior citizens who don’t have the kind of plan

you have, and who don’t have prescription pharmaceuticals covered. Do you think they should have their prescription pharmaceuticals covered or not?

Mrs. LEWIS. I think it should be covered by Medicare.

Mr. DINGELL. Ah, good. Thank you. Now, is your plan a nationwide plan, or is it one which is just peculiar to your area or to your

State?

Mrs. LEWIS. It is not throughout the country. It just happens to

be something that we have a great many companies like this one.

Mr. DINGELL. In California?

Mrs. LEWIS. Yes.

Mr. DINGELL. And they offer coverage only in California?

Mrs. LEWIS. I don’t believe so.

Mr. DINGELL. Is this a plan where the premiums are paid for

under Medicare?

Mrs. LEWIS. No.

Mr. DINGELL. So the premiums, then, for the plan that covers

you and offers you prescription pharmaceuticals, is not within

the—is not covered——

Mrs. LEWIS. It comes out of my Medicare.

Mr. DINGELL. [continuing] or the benefits are not made available

because of payments from Medicare. Is that right?

Mrs. LEWIS. Yes, it does.

Mr. DINGELL. I am not quite sure I understand.

Mrs. LEWIS. It does come from Medicare, a certain portion.

Mr. DINGELL. So Medicare pays the premiums for the plan that

you have; is that what you are telling us?

Mrs. LEWIS. Yes. My husband explained it in this fashion. Medicare is taking care of a certain portion for individuals. They are

paying the insurance companies to give me some——

Mr. DINGELL. How much do you pay in addition to what Medicare pays for the plan that you have?

Mrs. LEWIS. I pay——

Mr. DINGELL. So Medicare pays a part of the premium and you

pay a part of the premium?

Mrs. LEWIS. Yes.

Mr. DINGELL. How much do you pay a month?

Mrs. LEWIS. I pay $15 a month.

Mr. DINGELL. In addition to what Medicare——

Mrs. LEWIS. In addition to Medicare.

Mr. DINGELL. Okay. If you didn’t have prescription pharmaceuticals covered, you would have a pretty serious problem,

wouldn’t you?

Mrs. LEWIS. Yes, I certainly would. As it happens, I will admit

to you that I don’t pay taxes, we don’t pay taxes, so you know approximately what our income is.

Mr. DINGELL. So having said that, I am trying to understand, if

a senior in another part of the country doesn’t have the availability

48

of a plan of this kind, that senior is in some substantial difficulty,

isn’t he?

Mrs. LEWIS. My husband is reminding me that prior to being

with this company, my drug bills came to about $1,500 a year.

Mr. DINGELL. Well, I am pleased that you have found a way to

resolve this.

Mrs. LEWIS. I am very grateful, too.

Mr. DINGELL. Mr. Chairman, I thank you.

Mr. BILIRAKIS. I thank the gentleman.

Let’s see. Dr. Ganske?

Mr. GANSKE. Thank you, Mr. Chairman. So many questions, so

little time.

Thank you, Ms. Lewis, for being with us. I am over here. Thank

you very much for coming.

Mrs. LEWIS. You are very welcome.

Mr. GANSKE. Dr. Braun, I thank you also. I received an interesting letter from a constituent who I will not name, or the FDA

may go after him, but he says that he got a prescription from his

doctor and the cost was $2.43 per pill. Then he started to look

through the internet, and he found the following.

He said, ‘‘I can order through Pharmaworld in Geneva, Switzerland, after paying either of two American doctors $70 for a phone

consultation, a price of $1.05 per pill. I can order through Canadian

pharmacies’’—see attached letter—‘‘if I use a doctor certified in

Canada, or my doctor can order it on my behalf through his office

for 96 cents per pill, plus shipping. I can send $15 to a Texan’’—

and he encloses a letter—‘‘and get a number at a Mexican pharmacy who will send it without a prescription and it is priced at $52

per 100 pills.’’

Now, it so happens that when we passed the North American

Free Trade Agreement, the one thing that our own government

blocks our consumers from getting across the border is prescription

drugs, although obviously there are senior citizens who are going

through the internet and doing this at 50 percent off. I mean, I

hear this from all of my colleagues along the Canadian border and

along the Mexican border. We have examples of people just going

over and getting their prescription drugs at significant discounts.

Does AARP have a position on whether, if we address this pharmaceutical benefit problem, we should change the law to allow senior citizens to shop across the borders to fill their prescriptions?

Ms. BRAUN. I don’t believe that we have. That would only advantage people who lived close enough to the border to be able to go

back and forth.

Mr. GANSKE. Not necessarily, because you could live—this gentleman lives in Des Moines, Iowa, right in the middle of the country, and he can do this through the mail.

Ms. BRAUN. Through the net, yes.

Mr. GANSKE. So, has AARP taken a position on that?

Ms. BRAUN. We haven’t taken a position. We have some concerns

that the FDA has also, to be sure that the packaging and the warnings and the drug was the same in the first place, so there are I

think a lot of questions from that point of view, but we haven’t

taken a position on that one way or the other.

49

Mr. GANSKE. Is AARP going to take a position on that issue? Are

you looking at——

Ms. BRAUN. I don’t know. We have certainly discussed it and,

like you, we have gotten questions from our constituents or, you

know, our members, wanting to——

Mr. GANSKE. Well, I hear this from my constituents all the time,

and they are all AARP members.

Ms. BRAUN. And it is a concern, of course. Yes. Of course, the

other thing, fortunately lots of seniors are using the net, but there

certainly are an awful lot of them that wouldn’t know how to go

about that at all.

Mr. GANSKE. That is true.

Ms. BRAUN. So this person is very fortunate.

Mr. GANSKE. So this is something AARP is looking at?

Ms. BRAUN. Yes.

Mr. GANSKE. As a recommendation?

Ms. BRAUN. Yes. Our members have asked that we——

Mr. GANSKE. Changing our FDA regulations?

Ms. BRAUN. Yes. Our members have asked that we look at it,

and we started to consider it this year, and it is going to be considered.

Mr. GANSKE. Have you received a lot of requests from your members to look at that issue?

Ms. BRAUN. We have. Yes, we have received requests.

Mr. GANSKE. Okay. Now, let me get into the issue of funding. According to a recent CBO report, Congressional Budget Office report,

if we followed 1997, the Balanced Budget Act, we would see in the

next 10 years roughly about $1 trillion in surplus above and beyond Social Security, and we have said we are going to keep that

Social Security account separate. The second assumption was—that

is if you keep 1997 BBA and there is no emergency funding. That

is about a trillion in surplus.

The second scenario is, if you would just freeze spending at today’s level, then you would get about roughly a $600 billion surplus

over 10 years. The third scenario from the CBO was that if you increased spending according to a cost-of-living allowance and you

factored in average emergency funding, you would have about $300

billion in projected surpluses.

Now, we just passed a bill in Congress that, if it became law,

would eat up $182 billion. That is the marriage tax penalty. And

we are also very concerned about increasing coverage for the uninsured, for health insurance. So let’s just say that we increase, let’s

take the third scenario. We have got $300 billion——

Mr. BILIRAKIS. Please speed up your question so we can get a

quick response to it.

Mr. GANSKE. Okay. We have got $300 billion in surplus, or say

$400 billion, and we have got some tax relief in there that eats up

half of that. Okay. That leaves us with say $200 billion. We have

also got a problem with Medicare as it currently exists in a few

years not having enough money.

So my point is this: How much of what is probably a real surplus

should we devote to a pharmacy benefit, No. 1, just as a percentage?

50

Mr. BILIRAKIS. I am sorry, Greg, but you are taking advantage

of——

Mr. GANSKE. Excuse me, Mr. Chairman. I will finish this real

soon.

And, second, how much of that should go to—how much, what

percentage should senior citizens contribute to that pharmacy benefit?

Mr. BILIRAKIS. The gentleman’s time has expired. Do you have

a quick answer to that, Dr. Braun?

Ms. BRAUN. Yes. I think AARP does support using some of that

amount to support Medicare, to support prescription drugs being

covered. As to the exact figures, I am——

Mr. GANSKE. Would senior citizens be willing to assume 50 percent of the cost——

Mr. BILIRAKIS. The gentlelady——

Mr. GANSKE. I only want to know about percentage——

Mr. BILIRAKIS. The gentlelady from Colorado is recognized.

Ms. DEGETTE. Thank you, Mr. Chairman.

I would like to talk with you, Dr. Braun, for a couple of minutes

about some of the proposals that we have been hearing about to

provide drug benefits to seniors through State prescription programs. Are you aware of these types of programs, doctor?

Ms. BRAUN. Yes.

Ms. DEGETTE. Do you know whether they are available in all of

the States?

Ms. BRAUN. No. Actually, they are available in very few States,

and I think it was something like 14, maybe now up to 17 at this

point, but it is certainly not even a majority.

Ms. DEGETTE. Thank you. And something I have been a little bit

concerned about is that if we use a block grant type approach, all

States may not adopt this benefit right away. For example, Arizona

didn’t create a Medicaid program until 1985, which was 20 years

after the program was authorized by Congress. And I am wondering if you see this as a potential hazard if we go to a Statebased scenario?

Ms. BRAUN. Yes, I think we do have that concern. I think the

chairman himself has that concern about his own. I won’t put

words in his mouth.

Ms. DEGETTE. Let me ask another question, which is the GAO

study I think we are going to hear about on the drug benefits currently available to seniors, including the State pharmacy benefit

programs. GAO found that there is an enormous amount of variability among the State-based programs, and the deductibles in

these programs could go from zero to $640. Have you found that

to be an issue?

Ms. BRAUN. Yes, that is a major problem, just as it is in Medicaid.

Ms. DEGETTE. And what is AARP’s position on block grants in

general in the pharmaceutical arena, to States?

Ms. BRAUN. I think that is one way of taking care of the very

low income, but certainly not, you know, our preferred way, which

would be to be sure that everybody has the benefit.

Ms. DEGETTE. Thank you. Mr. Chairman, I just would like you

to indulge me for a moment. I, even though I didn’t hear Mrs.

51

Lewis testify, I read her testimony, and I think it is very useful to

have beneficiaries come in and actually talk to us about what is

going on.

I was a little dismayed when I heard her tell Mr. Dingell that

she and her husband are on a fixed income and don’t even have

to pay taxes, and I am sure it was very expensive for them to fly

here from California and to stay at a hotel and come and testify.

I am wondering if, using the chairman’s prerogative, we could

agree that the committee could find some way to pay their travel

expenses here today so they wouldn’t have to pay for this?

Mr. BILIRAKIS. Well, I really can’t respond to that in a way that

you would prefer because, you know, there is precedent. I honestly

don’t even know what the arrangements were that were made.

Staff would know. So we will look into that.

Ms. DEGETTE. If we can help——

Mr. BILIRAKIS. I very much appreciate your concern.

Ms. DEGETTE. [continuing] I would like to help out in any way

we can. Thank you, and I will yield back the balance of my time.

Mr. BILIRAKIS. Thank you.

Mr. Bilbray?

Mr. BILBRAY. Thank you, Mr. Chairman.

Doctor, I really appreciate your candor about, you know, where

we go from here on this issue, because I think AARP, you know,

could take the easy route and say, ‘‘Well, just spend more money

on this program, don’t look at the comprehensive repercussions.’’

And I appreciate the fact that you realize and are willing to stand

up and say spending just more money is not always the answer.

We need to look at how it affects the whole thing.

Ms. BRAUN. We have children and grandchildren, too.

Mr. BILBRAY. And I really, I just think that, hope that some of

us on both sides of the aisle are willing to take that responsibility

on in saying it isn’t as simple as we would like to say. It is not

a 30-second sound bite, even if it is an election year. So I think

that we can develop that bipartisan support on this issue following

your leadership, and I think that is critical.

Mrs. Lewis, I understand that you have been enrolled in a Medicare health maintenance organization for 16 years.

Mrs. LEWIS. That is correct.

Mr. BILBRAY. Can you tell the committee—and I need to preface

this by saying, Mr. Chairman, in my community in San Diego, almost 60 percent of seniors are on some kind of health maintenance

program, and so this is at least one community where we have seen

the private sector step in and actually provide some great options.

At least that is what I hear from my constituents, and I know that

isn’t available in other places.

But, Mrs. Lewis, can you explain to the committee how you first

selected this kind of coverage, first of all?

Mrs. LEWIS. It is kind of a personal message.

Mr. BILBRAY. Yes. Can you tell us how you found out about it?

You know, how did this——

Mrs. LEWIS. A neighbor in the area that we lived in at that time

told me what this particular company offered, and it sounded too

good to be true, but it proved to be true. I can’t give you figures.

52

I have no way of knowing exactly what it may cost them above and

beyond what I pay. I don’t know. I just know it is very comfortable.

Mr. BILBRAY. So if you were not in a situation where you were

talking to your neighbors, where you had that kind of community

communication, you may not have ever known about this program?

Mrs. LEWIS. It is possible. I believe that there were articles in

the newspaper at that time, but I hadn’t read it.

Mr. BILBRAY. Your recommendation, at least that we should be

looking at this type of option being made available for all seniors

as much as possible——

Mrs. LEWIS. Yes, I do.

Mr. BILBRAY. [continuing] why do you make that recommendation, again?

Mrs. LEWIS. I would make the recommendation because it is the

perfect situation for my husband and I. I don’t know about other

people and how they run their homes and what their income is. It

is not any of my business.

Mr. BILBRAY. The ranking member of the full committee pointed

out that with this private program, in cooperation with the public

support that we give Medicare+, we were looking at, what $45 a

month plus $15 of your own money a month for the

Medicare+Choice?

Mrs. LEWIS. And $5 a visit to a doctor.

Mr. BILBRAY. $5 to $10 co-pay.

Mrs. LEWIS. Right.

Mr. BILBRAY. And with your limited income, you can maintain

that financial participation in the program?

Mrs. LEWIS. We manage it.

Mr. BILBRAY. Okay. Doctor, I know this is a tough one for you

because I know that you have to confront your own internal politics

of the AARP. We all have our internal politics. Does it really seem

like it is impossible for us to make this kind of choice and this type

of participation in the choice available to all seniors through either

a private or a public program?

Ms. BRAUN. Do you mean making HMOs available all over the

country? Is that what you are saying?

Mr. BILBRAY. Not just HMOs, but let’s just say this cooperative

effort. The Congressman, the doctor was talking about the fact that

how much participation would AARP be willing to have the seniors

involved, and I think that we maybe here have a prototype to at

least look at, that here is seniors with limited income who are participating in a program, and frankly I think to a degree a bit of

pride that they are participating in the program. It is not just

being given to them. It is not just coming from their grandchildren

and children. Is there any possibility that AARP could support at

least looking into this strategy and having it, either public or private, having seniors participate at this level?

Mr. BILIRAKIS. A short response, please, Dr. Braun, if you can.

Ms. BRAUN. I still am not quite sure what you are talking about,

but I think it is wonderful where it is available, but it is not available in a great many places, and probably never will be in rural

areas.

53

Mr. BILBRAY. Mr. Chairman, my question was, though, if it was

available, would you support requiring seniors to participate at this

level in the financing formula?

Ms. BRAUN. In the financing formula?

Mr. BILBRAY. Yes.

Ms. BRAUN. Sure.

Mr. BILBRAY. Okay. Thank you very much. I appreciate it. Thank

you, doctor.

Mr. BILIRAKIS. Mr. Barrett?

Mr. BARRETT. Thank you, Mr. Chairman, and I do thank you for

holding these hearings. I think they are very beneficial.

I feel compelled to address some of the questions or the implicit

questions that were posed by several Members who are no longer

here, from the other side. And the first one dealt with a question

that was posed to Dr. Braun, as to asking you to choose between

Medicare coverage prescription drugs or cutting some other government service. It was presented, at least as I heard the question, it

was presented that these were the only two options, that you were

either going to get this or we are going to have to cut some—if you

were going to get this, we were going to have to cut some other

service.

I think that we have to put that notion to bed right away because, as Mr. Ganske indicated and others indicated, we have

passed legislation conferring tax breaks on married couples, some

who suffer a marriage penalty, others like myself who have a marriage bonus. And the decision was made that that was an easy

choice to make, that we could have a tax cut for $182 billion that

would benefit, a lion’s share of those benefits would go to wealthier

people.

So I just want to make sure that we understand that we are not

just talking here about services versus Medicare benefits, that

there is another factor in here, and that is tax cuts and who is

going to benefit from those tax cuts. And so if we are going to have

an honest debate, I think that that has to be included in that debate.

The other question that was posed or implicit question that was

posed, one of my colleagues talked about the price controls. Now,

I infer from his statement that he was talking about Tom Allen’s

bill, and I want to address that head-on because there is absolutely

nothing, absolutely nothing in that bill that sets price controls. The

prices are set by the pharmaceutical companies in conjunction with

the HMOs or the Federal Government, whoever they are bargaining with.

They drive a bargain between themselves and their preferred

customers. What the Allen bill does, it says once you pharmaceutical companies, once you have set that price, then you can’t discriminate, and for many of us that is a very, very important notion,

that seniors—and I don’t think that there is anybody in this room

that would dispute the fact, and I emphasize the word ‘‘fact,’’ that

seniors in this country who are not in HMOs, who do not have insurance plans, pay significantly higher amounts for those drugs

than anybody else basically in this world, that American seniors

are hit harder than anybody else, certainly than anybody in this

country.

54

My concern, as we debate this issue and we move toward a discussion as to whether Medicare should cover prescription drugs, is

if we simply take the current pricing mechanism that is out there,

the current marketing practices, and plop them from where they

are and plop them into Medicare, we have not addressed, we still

have not addressed that issue of price discrimination against seniors. All we have done is said, ‘‘Well, seniors will still be discriminated against, but rather than coming out of their own pocket, it

is going to come out of the government’s pocket.’’

And I think for the pharmaceutical companies that is just fine.

If they can continue to have that price differential, they don’t care

who is paying for it. If it is seniors, fine; if it is the government,

that is fine, too. But I get more sympathetic to some of the questions from some of my colleagues who are concerned about the cost

of the Medicare program, because I think if we have a plan that

simply shifts the current marketing system into Medicare and don’t

do anything about this price discrimination, that eventually it is

going to weaken the system.

The question I have for you, Dr. Braun, is along the lines of the

questions that I think again Mr. Ganske was posing. I would like

to see the AARP be more aggressive in saying, ‘‘We want freedom

of choice for our constituents,’’ for your constituents; that if these

drugs are being sold in Canada at a lower price, if they are being

sold in Switzerland at a lower price, if they are being sold in Mexico at a lower price, well, freedom of choice, everybody loves freedom of choice. If we are talking about how bad it is to put price

controls on companies, it is also bad to put purchasing controls on

purchasers, and we should take those off as well. Then the free

market can just run wild.

So I would ask you to reconsider or to consider more in depth the

position that your organization takes, because I think that that will

help move this debate forward.

So, having said that, Mr. Chairman, I would yield back the time.

Mr. BILIRAKIS. Thank you very much.

Mr. Lazio, to inquire?

Mr. LAZIO. I am not going to ask any questions. The only point

I want to make, and it is partly in response to my colleague, Mr.

Barrett, is that if every senior was in a PBM, they would all have

the benefit of that leverage or that market leverage. All of them

would be able to participate in lower prices. And so there are market mechanisms short of mandates that would help drive prices

down and give all seniors the benefits that seniors who have

Medigap policies, that they enjoy or that their insurance companies

enjoy or that their employers enjoy.

And with that I——

Mr. BARRETT. If the gentleman would yield——

Mr. LAZIO. Yes, I am happy to yield to the gentleman.

Mr. BARRETT. And I understand what you are saying and I agree

with it, but I think that almost by definition, the most vulnerable

and most isolated seniors are the ones that are least likely to be

attracted to those market mechanisms. And just as the chairman

was, I think, asking some legitimate questions as to shouldn’t we

be helping the most infirm and the sickest first, I think that we

have to recognize that the very people who are least likely to join

55

those organizations are the ones that are going to be the most vulnerable ones that the chairman was speaking of.

Mr. LAZIO. Reclaiming my time, we can create a structure, an infrastructure that provides the right incentives so that all seniors

can and will and will want to participate in that kind of marketrelated mechanism. It is just a question of whether we are going

to embrace the market system or we are going to look for, in my

opinion, look to a mandated approach that will have a good deal

of unforeseen consequences for seniors, especially during this time

of sort of a wild technological explosion.

I love to talk to kids when they come to Washington, because I

say, ‘‘I envy you, the things that you will see in your lifetime, the

creativity, the innovation, the discovery.’’ I mean, this is the age of

biological discovery. I just hope that whatever we do does not hamstring our ability to continue to explore the ends of the envelope

when it comes to those biological discoveries.

Mr. PALLONE. Could I ask the gentleman to yield? This goes

back, I think it is part of what you were getting at and part of

what Mr. Bilbray was getting at, but I was confused when Mr.

Bilbray asked Dr. Braun this question or Mrs. Lewis this question

about mandates.

Was he suggesting that, when he was asking you, was he asking

whether or not you would support mandating, if you will, that

every senior pay a certain amount the way Mrs. Lewis is? Or was

he actually saying that he thought there should be some sort of

mandate that seniors should have to participate in managed care?

It wasn’t clear to me, and I was just wondering maybe if you would

clarify that. Is it your position that you think that every senior

should be forced to pay a certain amount, or would you favor that

every senior would be able, should have to participate in managed

care? I was just confused about the question and maybe how you

responded to it.

Mr. LAZIO. Let me just, because I don’t have all that much time,

and I would be happy to yield if we have time, but it also matters

who controls the formulary. If the government controls the formulary, if the government controls what type of pharmaceuticals

are going to be available at what cost, we are going to have, in my

opinion, some significant distortions to the market that will have

impact on discovery and innovation.

So, you know, it is a broader question I think in a sense than

just should seniors be in some form of PBM. But——

Mr. GREENWOOD [presiding]. If the gentleman would yield on

that——

Mr. LAZIO. [continuing] you know, in other words——

Mr. GREENWOOD. Excuse me. The gentleman has yielded to the

temporary Chair. I also would like to comment about some of the

rhetoric that is used here.

There is no discrimination against seniors for prescription drug

benefits, for prescription drug products. There is an experience that

anyone of any age has when they walk into a drug store and buy

one product at a time, retail, without benefit of having a plan to

pay for them. That is what happens in the retail market, whether

you are buying bicycles or drugs.

56

What we are trying to do is create a system so that seniors get

the benefit of group purchasing leverage, so that they can enjoy

those kinds of reductions in prices and that we can subsidize the

cost of what they do have to pay. But I think we ought to, if we

are going to be truly bipartisan and get beyond some of the rhetoric

here, we ought to stop this rhetoric as if somebody is discriminating against seniors. We want to get seniors out of the one-byone retail market and put them in a group plan.

And I will recognize Ms. Eshoo for inquiry.

Ms. ESHOO. Thank you, Mr. Chairman, and thank you to both of

the witnesses that make up our first panel.

First I have some observations and then I have a question. I

think that what has come from you to the members of this committee today is that a universal system is important. That is what

Medicare is as an insurance policy for the seniors of our country,

so the issue of should it be for a handful, should it be for this group

or should it be for that group, should we segment the market, I

think that as far as AARP is concerned you have laid that to rest.

You are saying that we need a universal system.

We understand that Medigap insurance policies can be expensive. I know in my own experience in paying for that coverage

through AARP for my mother and father, I started out in the mideighties at $35 a month for the two of them, and the year that my

father died, which was 2 years ago, it had gone up to close to $300-

plus for the two of them. That is my own personal experience. I

still thought that it was a pretty good buy because we couldn’t get

it anywhere else.

We know that there has been a reliance on the private insurers,

i.e. the health management organizations, the HMOs, that they are

not obligated to remain in a geographic area, nor are they obligated

to keep up with the promise that they may have first offered to

those in order to bring them in to their insurance organization. In

the Bay area, the San Francisco Bay area, which is a known area

throughout the country, it is an area where the economy, the

ground is on fire, we are doing so well. And yet insurance company

after insurance company has pulled out of the market, and so what

Mrs. Lewis enjoys, many of the seniors that the Bay area delegation represents, they no longer enjoy those benefits because the insurance companies have pulled out of the market.

And with regard to the issue of reforming Medicare before we

offer another benefit, I would like to place something else on the

table. This is a reform that we are talking about here. This is a

very important reform to the system because no one would design

a system today without prescription drug coverage. What was a

part of the system in 1965, where they had surgical coverage, inhospital coverage was a must then. Prescription drug coverage is

a must today.

I think that once again the people of our country are ahead of

our government. They know that this is something that should be

a part of this system. In listening to you, Dr. Braun, I want to urge

you to take back to the AARP and its respective policy committees,

to come back to the Congress with what you see is the best way

of structuring this; not whether we should have it, not whether we

shouldn’t. I think that all of these things, most frankly, all of the

57

Members, regardless of their party, regardless of where they are,

for the most part anyway, in terms of their ideology, we know that

we need to provide this.

And to ask AARP to figure out our budget I think is unfair, but

I think we do need to look at how the best way this should be constructed, because there is a 500-pound gorilla in the room but no

one wants to take a look at it. The pharmaceutical companies do

not want HCFA to do the administrating. We know that. I mean,

I don’t know how many people have said it here, but they don’t

want that because they are hearing that there will be price controls, and let’s put it right out there. There are other models to

take a look at. I don’t know which way you may go, but I think

it might be a worthy exercise for AARP to take a look at it.

The one consistency in all of this is that seniors indeed do use

drugs, legally, and that they are increasingly paying more and

more out of their pocket for that. Too many are having to make an

awful choice between their rent, food, other necessities, on fixed,

rather low incomes, and we need to do something about this. So I

would ask you to go back to your policy committee and do some examination of which system you think would work better, or the

combinations thereof.

Now, my question. Some of the proposals that have been introduced would allow plans to vary the benefits that seniors get. For

example, HMOs would be allowed to tailor the drug benefit however they wanted. Some might choose to put high co-payments on

certain drugs; others might choose not to cover certain drugs at all.

Could you comment, Dr. Braun, on why you think it is so

important——

Mr. GREENWOOD. The gentlelady’s time has expired.

Ms. ESHOO. And she is going to answer, which has not expired.

Mr. GREENWOOD. No. I’m afraid the gentlelady’s time has expired.

Ms. ESHOO. Oh, Mr. Chairman, we are all spending a lot of time

here today. I mean, 30 seconds, can I ask the committee for 30 seconds?

Mr. GREENWOOD. Certainly you can ask. We will yield you the

additional 30 seconds.

Ms. ESHOO. Thank you.

Could you comment, Dr. Braun, on why you think it is so important to ensure that Medicare provides a defined benefit?

Ms. BRAUN. I think we need the defined benefit so that, if we

bring competition into the field, you really need to know what you

are competing on. And therefore I think, you know, we do need to

have a defined benefit in the program.

Ms. ESHOO. Thank you.

Mr. GREENWOOD. The gentleman, Mr. Strickland, is recognized

for inquiry.

Mr. STRICKLAND. Thank you, Mr. Chairman.

I took note of the accurate point that seniors are not discriminated against in a technical sense in drug pricing, but the fact is

that more seniors in this country are more likely to be ill and need

more medications, and so in a practical sense they are the part of

our population that bears the brunt of this price discrimination. It

is not only directed toward seniors, but seniors bear a disproporVerDate 11-MAY-2000 13:23 Jul 12, 2000 Jkt 064041 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 E:\HEARINGS\62971 pfrm07 PsN: 62971
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tionate burden for that price discrimination than any other sector

of our population, so I think in a practical sense we can say seniors

are being discriminated against in the way drugs are priced.

I have heard references to price controls today, and many of my

colleagues who tout the world economy I think probably do not recognize the fact that all the other countries have price controls of

one sort or another on prescription drugs, so once again it is the

American consumer that is bearing the brunt of what we say is

necessary in terms of pharmaceutical profits in order to carry out

the research to bring new and better, more effective drugs on

stream. The fact is that the American consumer is being treated

grossly unfairly in the way these drugs are being priced.

And the third thing I would like to say to our honored guests

here today is that I represent an area in southern Ohio that is a

very poor Appalachian area, and I encounter on a weekly basis seniors who would give everything they have, which may not be very

much, to have access to the kind of benefit plan that you described

in San Diego. And I am very sorry that I was not here when you

gave your testimony. I have read it, and I am anxious to find out

how such a generous benefit could be available and still allow whoever is providing it to be financially solvent.

But I want to thank you for being here. I think you both have

contributed greatly to our understanding of this problem.

Mr. BARRETT. Would the gentleman yield?

Mr. STRICKLAND. Yes, I would.

Mr. BARRETT. I just want to respond to the chairman on my

statement using ‘‘discrimination’’ and make it very clear what I

meant. The current marketing system has a much greater discriminatory impact on seniors, who disproprotionately are not covered

by health plans that help pay for the cost of prescription drugs.

The intent, the stated intent may not be to discriminate against

seniors, but because seniors are disproportionately not covered by

health care plans, they bear the brunt of this discriminatory marketing system. That is what I meant, and that is what I meant to

say.

Mr. GANSKE. Would the gentleman yield?

Mr. PALLONE. Would the gentleman yield?

Mr. STRICKLAND. I yield to the gentleman from New Jersey.

Mr. PALLONE. I just wanted to ask the gentleman to yield the

time that he has left.

Dr. Braun, just again so I understand you, when Mr. Bilbray was

asking Mrs. Lewis about—or asking you about Mrs. Lewis’ plan

and saying that he wanted to know whether you would support,

you know, everyone being mandated to have something like that,

it wasn’t clear if he was asking whether or not we should mandate

that everyone pay a certain amount per month, like she has a $15

per month co-pay or something, or whether he was asking if everyone should be part of a managed care plan. And you answered affirmatively, and I just wanted to clarify that, AARP’s position on

that.

Ms. BRAUN. No, I certainly did not see it as mandatory for everybody to join a managed care plan. I think I was responding to the

fact that the low costs that Mrs. Lewis has certainly are something

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that could be borne by beneficiaries, that that is within a normal

range of what could be borne.

Mr. PALLONE. Okay. Thank you.

Mr. GREENWOOD. If I may, if the gentleman would yield 30 seconds to me, the point that I was making, Mr. Barrett, is that I

think the word ‘‘discrimination’’ is a poor word to describe the phenomenon of the marketplace.

I cannot go to Detroit, knock on General Motors’ door and ask

them to sell me a Chevrolet for the same price that a dealer would

get the Chevrolet, because I am not buying train loads of them.

There is no economy of scale there. So that is what we are confronting in the retail market. It is not discrimination, it is an economic fact of life that we want to overcome. We want to change

that economic set of circumstances so seniors do have the purchasing power, virtually wholesale purchasing power, not retail

purchasing power.

Mr. BARRETT. If the gentleman would yield again, just for 15

seconds——

Mr. GREENWOOD. Fifteen seconds.

Mr. BARRETT. [continuing] my point is the impact. I think we

have to look at the impact, and I stand behind my statement that

the impact against seniors is far more discriminatory.

Mr. GREENWOOD. All right. Enough of these semantical battles.

The Chair recognizes Mr. Waxman, who wishes to make a unanimous consent request for a submission to the record. Is that correct?

Mr. WAXMAN. Yes, Mr. Chairman. I have two documents from

AARP and another one from Leadership Council of Aging Organizations. I would like to have it made part of the record.

[The information referred to follows:]

AARP

January 28, 2000

The Honorable PETE STARK

239 Cannon House office Building

U.S. House of Representatives

Washington, D.C. 20515

DEAR REPRESENTATIVE STARK: I am writing in response to your letter concerning

the design of a Medicare prescription drug benefit. Your commitment to prescription

drug coverage for Medicare beneficiaries and long-standing leadership on this issue

continue to be deeply appreciated.

Like you, AARP is committed to creating a Medicare prescription drug benefit for

all beneficiaries as a high priority in Medicare reform. We believe modernizing

Medicare’s benefit package to keep up with advances in medicine is a must. Because

prescription drugs are central to the delivery of high quality health care, Medicare

should be like most other health insurance plans and include prescription drugs as

part of Medicare’s defined benefit package offered by all participating plans as well

as in traditional fee-for-service.

AARP is committed to pursuing the answers to the questions you have raised and

to continuing to advance the debate over the best way to assure that a prescription

drug benefit that is available and affordable to all Medicare beneficiaries becomes

part of Medicare’s defined benefit package. We have identified some fundamental

principles to guide the development of a Medicare prescription drug benefit:

• A Medicare prescription drug benefit must be available to all Medicare beneficiaries.

• Prescription drugs should be part of Medicare’s defined benefit package. It is critical that beneficiaries understand what is included in their benefit and that

they have dependable and stable prescription drug coverage.

• The benefit needs to be affordable to assure enough participation and thereby

avoid the dangers of risk selection. To this end, the government contribution

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will need to be significant enough to yield a premium that is affordable and attractive and a benefit design that is responsive to beneficiaries’ needs. Medicare

Part B is a model in this regard. The Part B benefit is voluntary, but Medicare’s

contribution toward the cost of the benefit elicits virtually universal participation.

• Beneficiaries should be able to keep the coverage that they currently have, if they

choose to do so. A Medicare prescription drug benefit should not be an incentive

for employers to drop or cut back on retiree health coverage.

• The benefit must assure that beneficiaries have access to needed drug therapies.

• The benefit must include quality improvement components to reduce medical errors and mismedication and to help reduce overall health care costs.

• The benefit must include meaningful cost-containment for both beneficiaries and

the Medicare program. This should include drug purchasing strategies that enable Medicare beneficiaries and the program to take advantage of the aggregate

purchasing power of Medicare beneficiaries.

• The benefit must provide additional subsidies for low-income beneficiaries to protect them from unaffordable costs and assure that they have access to the benefit.

• The benefit must be financed in a fiscally responsible manner that is both adequate and stable. AARP believes that an appropriate amount of the Federal

budget surplus should be used to help finance a prescription drug benefit.

• A new prescription drug benefit should be part of a strong Medicare program. Prescription drug coverage must be integrated into the program in a manner that

preserves and strengthens Medicare.

We understand your interest in ranking the importance of the variables involved

in designing a drug benefit. At this time, however, AARP is in the process of evaluating what would make sense from a policy perspective as well as the type of benefit

that would best meet the needs of current and future beneficiaries. For example,

there are strong indications that older Americans want stop-loss coverage, but there

are also indications that they want some degree of first dollar protection. Yet, depending on the amount of the corresponding premium, beneficiaries may not be able

to afford a comprehensive benefit. More importantly, we are not yet prepared to say

what type of drug benefit design the public will support because we do not know

what other changes will occur as part of Medicare reform and that their impact will

be on beneficiaries.

We believe these principles will help define a Medicare prescription drug benefit

that our broad-based membership can support. The task of designing a drug benefit

will not be easy, but we look forward to working with you in this effort to carefully

explore the best options for a Medicare prescription drug benefit. Please do not hesitate to contact me or have your staff contact Tricia Smith or Mila Becker of our Federal Affairs Department at (202) 434-3770.

Sincerely,

HORACE B. DEETS

LEADERHIP COUNCIL OF AGING ORGANIZATIONS

February 7, 2000

United States House of Representatives

Washington, DC 20515

DEAR REPRESENTATIVE: The undersigned members of the Leadership Council of

Aging Organizations (LCAO) look forward to working with the Congress on the creation of a Medicare prescription drug benefit.

As you consider current proposals and draft new prescription drug proposals, we

would like you to consider the following issues that are of the highest priority to

our organizations and the millions of Americans that we represent.

Benefits

• Medicare should guarantee access to a voluntary prescription drug benefit as a

part of its defined benefit package.

• Medicare’s prescription drug benefit should provide comprehensive coverage, including the most current, effective, and individually appropriate drug therapies.

• Medicare’s contribution toward the cost of the prescription drug benefit must keep

pace with the increase in prescription drug costs and not be tied to budgetary

caps.

• Adding a Medicare prescription drug benefit must not reduce access to other

Medicare benefits.

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Coverage

• The Medicare prescription drug benefit should be available to all Medicare eligible

older Americans and persons with disabilities, regardless of income or health

status.

• The Medicare prescription drug benefit must be voluntary and must provide safeguards against the erosion of current prescription drug coverage provided by

others.

Affordability

• The financing of a new Medicare prescription drug benefit should protect all beneficiaries from burdensome out-of-pocket expenses and unaffordable cost sharing,

particularly low-income beneficiaries.

• The new benefit must protect individuals from extraordinary expenses for prescription drugs.

• The government subsidy must be sufficient to guard against risk selection and to

provide an attractive benefit design.

• Sufficient subsidies should be provided for low-income beneficiaries to ensure that

they have access to the benefit.

Administration

• The new prescription drug benefit should be efficiently managed, include appropriate cost-containment, and reflect the purchasing power of the Medicare beneficiary pool.

Quality

• The new Medicare prescription drug benefit must meet rigorous standards for

quality of care, including appropriate monitoring and quality assurance activities.

• The Medicare program should work to prevent the overuse, underuse, and misuse

of prescription drugs.

We request that you carefully consider the issues presented above as you develop

your Medicare prescription drug proposals. We look forward to working with you to

ensure that the Medicare program is strengthened by your efforts.

Sincerely,

AARP; AFSCME Retiree Program; Alzheimer’s Association; American Association

for International Aging; American Association of Homes and Services for the Aging;

American Federation of Teachers Program on Retirement and Retirees; American

Society of Consultant Pharmacists; Asociacion Nacional Pro Personas Mayores; Association for Gerontology and Human Development in Historically Black Colleges

and Universities; Association of Jewish Aging Services; B’nai B’rith Center for Senior Housing and Services; Eldercare America, Inc.; Families, USA; The Gerontological Society of America; Gray Panthers; National Academy of Elder Law Attorneys; National Asian Pacific Center on Aging; National Association of Area Agencies

on Aging; National Association of Foster Grandparent Program Directors; National

Association of Nutrition and Aging Services Programs; National Association of Retired and Senior Volunteer Program Directors, Inc.; National Association of Senior

Companion Project Directors; National Association of State Long-Term Care Ombudsman Programs; National Association of State Units on Aging; National Caucus

and Center on Black Aged, Inc.; National Committee to Preserve Social Security and

Medicare; National Council of Senior Citizens; National Council on the Aging, Inc.;

National Hispanic Council on Aging; National Indian Council on Aging, Inc.; National Osteoporosis Foundation; National Senior Citizen Law Center; Older Women’s

League.

Mr. GREENWOOD. Without objection, the Chair would enter a request for unanimous consent to submit for the record a CRS report

titled, ‘‘Discharge Use in the House: Recent Use and Historical

Context,’’ which goes to the comments of Mr. Stupak that it is unlikely that discharge resolutions result in legislation. This is a list

from CRS as to how frequently that happens. Without objection, so

entered.

[The information referred to follows:]

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64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

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Mr. WAXMAN. It has happened.

Mr. GREENWOOD. It has happened.

We thank the witnesses for your tenacity and your fortitude to

stay here for at least 3 hours. We figure that during the 3 hours

we listened to you for 40 minutes and you listened to us for 3 hours

and 20 minutes, but we thank you for that, and you are excused

now, please.

Mr. BILIRAKIS. I join in my gratitude to Mrs. Lewis and Dr.

Braun, and would now invite the second panel to come forward finally. May we have order, please?

Ms. Bonnie Washington, director of the Office of Legislation,

Health Care Financing Administration, accompanied by Dr. Jack

Hoadley, who is director of the Division of Health Financing Policy;

and Dr. William J. Scanlon, director of Health Financing and Public Health Issues with the General Accounting Office. Welcome, Ms.

Washington and Drs. Hoadley and Scanlon.

Again, your written statement is a part of the record. We are

going to set the clock at 5 minutes. You know, we are obviously

running behind because we had those two votes and what not. I

certainly will not plan to cut you off if you need an extra minute

or 2 or 3. So we will start off with Ms. Washington. Please proceed.

STATEMENTS OF BONNIE WASHINGTON, DIRECTOR, OFFICE

OF LEGISLATION, HEALTH CARE FINANCING ADMINISTRATION, ACCOMPANIED BY JACK HOADLEY, DIRECTOR, DIVISION OF HEALTH FINANCING POLICY; AND WILLIAM J.

SCANLON, DIRECTOR, HEALTH FINANCING AND PUBLIC

HEALTH ISSUES, GENERAL ACCOUNTING OFFICE

Ms. WASHINGTON. Thank you, Chairman Bilirakis, Congressman

Waxman, and other distinguished subcommittee members. Thank

you for inviting us here today to discuss the need to provide prescription drug coverage in Medicare.

All beneficiaries need access to an affordable drug benefit. Pharmaceuticals are as essential today as hospital care was when Medicare was created, but too many people are missing out. As many

people lack drug coverage today as lacked hospital coverage when

Medicare was created. Three out of five Medicare beneficiaries do

not have dependable coverage, and only half have coverage the

whole year through. One-third of Medicare beneficiaries have no

drug coverage at all.

Beneficiaries without coverage are forced to pay full retail prices

out of their own pockets because they do not get the generous discounts that are offered to large purchasers. The result is that many

beneficiaries go without the medicine they need to keep them

healthy and out of the hospital.

Coverage is not just a problem for the poor. More than half of

the beneficiaries who don’t have coverage for drugs have incomes

above 150 percent of poverty. Those with coverage are often finding

that it costs more and covers less over time, and for some beneficiaries it is disappearing altogether as employers drop retiree coverage. Clearly, all beneficiaries need access to affordable drug coverage.

The President has identified four key principles that a Medicare

drug benefit must meet. First, it must be a voluntary benefit availVerDate 11-MAY-2000 13:23 Jul 12, 2000 Jkt 064041 PO 00000 Frm 00098 Fmt 6633 Sfmt 6602 E:\HEARINGS\62971 pfrm07 PsN: 62971
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able to all beneficiaries, because access can be a problem for all

kinds of beneficiaries.

The benefit must have competitive and efficient administration,

be integrated into the Medicare benefit package, but use the private sector to deliver it.

It must be affordable for both beneficiaries and taxpayers. This

means providing enough assistance so almost all beneficiaries participate. Otherwise, mostly those with high drug costs would enroll,

and the benefit would become unaffordable and eventually become

unsustainable.

Finally, the benefit must ensure access to all medications that

physicians deem to be medically necessary, and it also must encourage high quality care with quality standards such as protections against medication errors.

The President’s plan meets those principles. It is voluntary, and

it is managed by private sector pharmacy benefit managers. It is

affordable, with a 50 percent premium subsidy and extra help for

low income beneficiaries. And Mrs. Lewis should know that the

President’s plan guarantees that HMOs like hers will be able to

continue to provide the drug coverage that she depends on. Right

now, as you know, many HMOs don’t, and many that do have been

cutting back or raising the premiums for that coverage.

Chairman Bilirakis, we have broad consensus that we must act

to establish a Medicare drug benefit that everyone can count on.

We have a growing budget surplus and dramatic improvements in

Trust Fund solvency. We have a historic opportunity to strengthen

and modernize the Medicare program and keep our commitment to

meet the medical needs of the elderly and the disabled.

Thank you again for inviting us to be here, and we look forward

to continuing to work with this committee on proposals to modernize Medicare. Dr. Hoadley and I would be happy to answer any

questions that you have.

[The prepared statement of Bonnie Washington follows:]

PREPARED STATEMENT OF BONNIE WASHINGTON, DIRECTOR, OFFICE OF LEGISLATION,

HCFA

Chairman Bilirakis, Congressman Brown, distinguished Subcommittee members,

thank you for inviting us to discuss the need, and our proposal, to provide prescription drug coverage for Medicare beneficiaries.

We must act now to ensure that all beneficiaries have an affordable prescription

drug benefit. Pharmaceuticals are as essential to modern medicine today as hospital

care was when Medicare was created.

Lack of prescription drug coverage among senior citizens and people with disabilities today is similar to the lack of hospital coverage among senior citizens when

Medicare was created. Three out of five lack dependable coverage. Only half of beneficiaries have year-round coverage, and one third have no drug coverage at all. They

must pay for essential medicines fully out of their own pockets, and are forced to

pay full retail prices because they do not get the generous discounts offered to insurers and other large purchasers. The result is that many go without the medicines

they need to keep them healthy and out of the hospital.

Drug coverage is not just a problem for the poor. More than half of beneficiaries

who lack coverage have incomes above 150 percent of the federal poverty level

(above $17,000 for an elderly couple). Even those with most types of coverage find

it costs more and covers less. Copayments, deductibles and premiums are up. And

coverage is often disappearing altogether as former employers drop retiree coverage

and Medigap is not available to everyone. Clearly all beneficiaries need access to

affordable prescription drug coverage.

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KEY PRINCIPLES

The President has identified four key principles that a Medicare drug benefit

must meet.

• It must be a voluntary benefit accessible to all beneficiaries. Since access

is a problem for beneficiaries of all incomes, ages, and areas, we must not limit

a Medicare benefit to a targeted group.

• It must be affordable to beneficiaries and the program. We must provide

assistance so almost all beneficiaries participate. Otherwise, primarily those

with high drug costs would enroll and the benefit would become unaffordable.

• It must have a competitive and efficient administration. We must integrate

the benefit into Medicare but use the private sector to deliver it.

• It must ensure access to needed medications and encourage high-quality

care. Beneficiaries must have access to the medications that their physicians

deem to be medically necessary, and they must have the assurance of minimum

quality standards, including protections against medication errors.

The President’s plan meets these principles.

• Beneficiaries will have access to an optional drug benefit through either traditional Medicare or Medicare managed care plans. Those with retiree coverage

can keep it.

• Premiums will be affordable, with extra assistance for those with low-incomes.

• There will be no price controls or new bureaucracy; instead, the new benefit will

be offered through private pharmacy benefit managers who can efficiently negotiate fair prices. All qualified pharmacies will be allowed to participate.

• Beneficiaries can get all drugs prescribed by their physicians from private benefit

managers who meet minimum quality standards.

We have broad consensus that we must act now to establish a drug benefit for

Medicare beneficiaries. We have an historic opportunity provided by the growing

budget surplus and dramatic improvements in Medicare Trust Fund solvency. We

have an obligation to keep our commitment to meet the medical needs of seniors

and the disabled. And this can only be done by making a voluntary, affordable, accessible, competitive, efficient, quality drug benefit available to all beneficiaries, as

proposed by the President, in the context of Medicare reform.

BACKGROUND

Prescription drugs can prevent, treat, and cure more diseases than ever before,

both prolonging and improving the quality of life. Proper use should minimize hospital and nursing home stays, and may help decrease the total cost of care.

Recognizing that prescription drugs are essential to modern medicine, the private

sector now includes outpatient drug coverage as a standard benefit in almost all

policies. Further, all plans in the Federal Employees Health Benefits Program are

required to offer a prescription drug benefit. No one would design Medicare today

without including coverage for prescription drugs. Prescription drugs are particularly important for seniors and disabled Americans, who often take several drugs

to treat multiple conditions. All across the country, Medicare beneficiaries are suffering physical and financial harm because they lack coverage.

Current coverage for prescription drugs for Medicare beneficiaries is incomplete

and unreliable, as shown by data based on the Medicare Current Beneficiary Survey

(MCBS). The MCBS is used to gather data on prescription drug coverage and spending. Although that survey only provides information through 1995, we have used additional information that allows us to discuss some disturbing trends since that

time.

We project that this year more than half of Medicare beneficiaries will use prescription drugs costing $500 or more, and 38 percent will spend more than $1000.

Each year, about 85 percent of Medicare beneficiaries fill at least one prescription.

Yet one third of beneficiaries have no coverage for drugs at all. And, in 1996, more

than half did not have drug coverage for the entire year.

About half of the beneficiaries without coverage have incomes above 150 percent

of poverty, demonstrating that this is not just a low-income problem. All these beneficiaries are forced to pay excessively high costs for needed prescriptions because

they do not get the deep discounts offered only to insurers and other large purchasers.

This situation is worse for the 10 million Medicare beneficiaries who live in rural

areas. Nearly half of these beneficiaries have absolutely no drug coverage. They

have less access to employer-based retiree health insurance because of the job structure in rural areas. And three-quarters of rural beneficiaries do not have access to

Medicare+Choice plans and the drug coverage that many of these plans provide.

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In 1995, about 30 percent of Medicare beneficiaries had private sector coverage

offered by former employers to retirees. And this coverage is eroding. The number

of firms with 500 or more employees offering retiree health coverage dropped 40 percent in 1994 to 30 percent in 1998, according to the employee benefits research firm

Mercer/Foster Higgins (numbers for small firms would be even lower).

The true impact of this trend has not yet been realized, because some employers’

decisions to drop coverage apply only to future retirees. Furthermore, a recent survey prepared for the Kaiser Family Foundation reported that 40 percent of large

employers would consider cutting back on prescription drug coverage in the next

three to five years. As today’s workers retire, the population of Medicare beneficiaries with access to retiree coverage is likely to be well below the levels reported

in our surveys.

About one in six Medicare beneficiaries today are enrolled in Medicare+Choice

plans, most of which include some drug coverage. Although Medicare+Choice plans

are only required to provide the traditional Medicare benefit package, the majority

of them also provide prescription drugs, which is one reason why they have been

popular with Medicare beneficiaries.

Nearly one-third of all beneficiaries, however, lack a Medicare+Choice option because they live in areas where there are no plans. And where plans are available,

they have been raising premiums and copayments for drugs, while lowering caps on

drug coverage. In 2000, three quarters of plans cap benefit payments at or below

$1000, and nearly one-third of plans cap coverage at $500 or less, even though the

majority of Medicare beneficiaries use prescription drugs costing $500 or more each

year.

About one in eight Medicare beneficiaries have drug coverage through Medicaid.

Eligibility for Medicaid, however, is restricted to beneficiaries under 100% of poverty, and the majority of beneficiaries eligible for such coverage—60 percent—are

not enrolled in the program. This enrollment problem persists despite increasing

outreach efforts to enroll those who are eligible.

Roughly one in ten Medicare beneficiaries obtain drug coverage from a supplemental Medigap plan. Medigap coverage, however, is expensive and its availability

is not guaranteed except right after a beneficiary turns 65.

Costs for these policies are rising rapidly, by 35 percent between 1994 and 1998,

according to Consumer Reports, in part because those being covered this way are

less healthy than the average beneficiary. The General Accounting Office (GAO)

found that almost half of all Medigap insurers implemented substantial increases

in 1996 and 1997, with AARP—one of the largest Medigap providers, and the only

one offering a community-rated policy covering prescription drugs—increasing rates

by 8.5 percent in 1997, 10.9 percent in 1998, and 9.4 percent in 1999.

The GAO also found that Medigap premiums for plans that include drug coverage

vary widely, both within and across States. For example, premiums charged to a 65-

year-old beneficiary for the standardized ‘‘I’’ Medigap plan ranged from $991 to

$5,943 in 1999. And the average premium for the standardized ‘‘H’’ Medigap plan

ranges from $1,174 in Virginia to $2,577 in Georgia.

Furthermore, premiums for Medigap coverage can increase with age in most

States. In some parts of the country, beneficiaries over age 75 are paying more than

$100 per month for a plan with drug coverage over and above the premium for a

comparable plan without drug coverage. This occurs despite the fact that the maximum annual payment for drug costs in the ‘‘H’’ and ‘‘I’’ plans is only $1250 per

year, barely over $100 a month.

THE PRESIDENT’S PLAN

The President has proposed a comprehensive Medicare reform plan that includes

a voluntary, affordable, accessible, competitive, efficient, quality drug benefit that

will be available to all beneficiaries. The President’s plan also dedicates over half

of the on-budget surplus to Medicare and extends the life of the Medicare Trust

Fund to at least 2025. It also improves preventive benefits, enhances competition

and use of private sector purchasing tools, helps the uninsured near retirement age

buy into Medicare, and strengthens program management and accountability.

The President’s drug benefit proposal makes coverage available to all beneficiaries, regardless of their incomes. The hallmark of the Medicare program since

its inception has been its social insurance role—everyone, regardless of income, is

entitled to the same basic package of benefits. This is a significant factor in the unwavering support for the program from the American public and must be preserved.

All workers pay taxes to support the Medicare program and therefore all beneficiaries should have access to a new drug benefit.

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A universal benefit also helps ensure that enrollment is not dominated by those

with high drug costs (adverse selection), which would make the benefit unaffordable

and unsustainable. And, as I described earlier, lack of drug coverage is not a lowincome problem—beneficiaries of all incomes face barriers.

The benefit is completely voluntary. If beneficiaries have what they think is better

coverage, they can keep it. And the President’s plan includes assistance for employers offering retiree coverage that is at least as good as the Medicare benefit to encourage them to offer and maintain that coverage. This will help to minimize disruptions in parts of the market that are working effectively, and it is a good deal

for beneficiaries, employers, and the Medicare program.

We expect that most beneficiaries will choose this new drug option because of its

attractiveness, affordability, and stability.

For beneficiaries who choose to participate, Medicare will pay half of the monthly premium, with beneficiaries paying an estimated $26 per month in 2003. The independent HCFA Actuary has concluded that at least 50 percent of the premium must

be subsidized in order to ensure adequate participation. A lesser subsidy would result in adverse selection and thus an unaffordable and unsustainable benefit.

Under the President’s plan, Medicare will pay half the cost of each prescription, with no deductible. The benefit will cover up to $2,000 of prescription drugs when

coverage begins in 2003, and increase to $5,000 by 2009, with a 50 percent beneficiary coinsurance. After that, the dollar amount of the benefit cap will increase

each year to keep up with inflation.

For beneficiaries with higher drug costs, they will continue to receive the discounted prices negotiated by the private benefit managers after they exceed the coverage cap. And, to help beneficiaries with the highest drug costs, we are setting

aside a reserve of $35 billion over the next 10 years, with funding beginning in

2006. It will be available so that Congress and the Administration can work in collaboration to design protections for those with the greatest need.

Benefit managers, such as pharmacy benefit manager firms and other eligible

companies, will administer the prescription drug benefit for beneficiaries in the traditional Medicare program. These entities will bid competitively for regional contracts to provide the service, and we will review and periodically re-compete those

contracts to ensure that there is healthy competition. The drug benefit managers—

not the government—will negotiate discounted rates with drug manufacturers, as

they do now in the private sector. We want to give beneficiaries a fair price that

the market can provide without a statutory fee schedule or price controls.

The drug benefit managers will have to meet access and quality standards, such

as implementing aggressive drug utilization review programs. And their contracts

with the government will include incentives to keep costs and utilization low.

In general, all therapeutic classes of drugs will be covered. Each drug benefit

manager will be allowed to establish a formulary, or list of covered drugs. They will

have to cover off-formulary drugs when a physician requests a specific drug that is

not on the formulary. Coverage for the handful of drugs that are now covered by

Medicare will continue under current rules and will not be included in the new drug

benefit package.

And Medicare+Choice plans will benefit from the President’s Plan. Beneficiaries

enrolled in Medicare+Choice plans will receive this optional coverage through those

plans, and the plans will use their existing management tools to negotiate prices

and formularies. In some markets today, M+C plans offer prescription drug coverage

using the excess from payments intended to cover basic Medicare benefits. Under

the President’s proposal, M+C plans in all markets will be paid explicitly for providing a drug benefit, so they no longer have to depend on what the rate is in a

given area to determine whether they can offer a benefit. We estimate that plans

will receive $54 billion over 10 years to pay for the costs of drug coverage.

We will no longer see the extreme regional variation in Medicare+Choice drug

coverage. Today, only 23 percent of rural beneficiaries with access to

Medicare+Choice have access to prescription drugs, compared to 86 percent of urban

beneficiaries. Under the President’s plan, both rural and urban beneficiaries will

have drug coverage available from all Medicare+Choice plans in their area. And

beneficiaries will not lose their drug coverage if a plan withdraws from their area

or if they choose to leave a plan.

The President’s budget proposes to pay for the drug benefit through a combination

of premiums and dedication from the on-budget surplus. Premiums will be collected

like Medicare Part B premiums, as a deduction from Social Security checks for most

beneficiaries who choose to participate. Beneficiaries pay roughly half of program

costs.

Low-income beneficiaries would receive special assistance. States may elect to

place those who now receive drug coverage through Medicaid in the Medicare drug

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program instead, with Medicaid paying premiums and cost sharing as for other

Medicare benefits. We would expand Medicaid eligibility so that all beneficiaries

with incomes up to 135 percent of poverty would receive full assistance for their

drug premiums and cost sharing. Beneficiaries with incomes between 135 and 150

percent of poverty would pay a partial, sliding-scale premium based on their income.

The Federal government will fully fund States’ Medicaid costs for the beneficiaries

between 100 and 150 percent of poverty.

MEETING BASIC PRINCIPLES

In any proposal to provide a prescription drug benefit for Medicare beneficiaries,

it is essential that the key principles identified by the President be met.

• It must be a voluntary benefit accessible to all beneficiaries.

• It must be affordable to beneficiaries and the program.

• It must be competitive and efficient.

• It must ensure access to needed medications and encourage high-quality care.

Unfortunately, some of the proposals to establish a Medicare drug benefit fail to

meet one or more of these criteria.

Proposals that cover prescriptions for only some diseases fail to provide access for

all beneficiaries who need coverage. The number of conditions for which effective

drug treatments are available is growing at an unprecedented pace. All beneficiaries

need to know that they will have affordable access to the drugs they need when they

need them.

Proposals that provide assistance only to low-income beneficiaries also fail to

guarantee access for all beneficiaries. Most lacking drug coverage have incomes

above 150 percent of poverty, and it is increasingly difficult for them to afford the

medicines they need as drug prices rise faster than inflation. It also is essential that

we maintain the principle that all Medicare benefits are equally available to all

beneficiaries. This is a pillar of the program’s strength and overwhelming support

among the American people.

Proposals with a premium subsidy of only 25 percent would make the benefit

unaffordable to many low and middle-income beneficiaries unable to shoulder the

remaining 75 percent. As a result, the benefit would attract a disproportionate number of enrollees with high drug costs. That would drive up the price of premiums,

which would further discourage those with lower incomes or lower drug costs from

enrolling, and in the end result in an unsustainable program. As mentioned above,

the independent HCFA actuary has concluded that a subsidy of at least 50 percent

is essential to attract a range of enrollees wide enough to maintain an adequate risk

pool.

Proposals with continuous or annual open enrollment periods would be especially

vulnerable to attracting enrollees with high drug costs because beneficiaries could

wait until they had substantial drug costs before enrolling. This would exacerbate

adverse selection problems caused by an inadequate premium subsidy.

Proposals that link a drug benefit to a high-option Medicare plan with additional

benefits like a stop-loss for out-of-pocket costs also make the drug benefit less affordable. Beneficiaries who elect the high option would have to pay not only for drug

coverage but also for all the other higher costs of the high option plan that many

would not need, want, or be able to afford.

Proposals that fail to establish private sector benefit managers everywhere, and

instead merely allow private plans to offer coverage when and where they wish, fail

to ensure access for all beneficiaries. The benefit would be available only in regions

where Medigap and other private plans step forward to offer it. Medigap insurers

have already said they would not find stand-alone drug policies an attractive business proposition and are currently offering drugs less frequently. Medigap plans also

have little experience negotiating with drug manufacturers and do not pool the purchasing power of seniors. That could well make the coverage unaffordable for many

beneficiaries.

And, finally, proposals that do not include a minimum or specified benefit design

cannot ensure access or high-quality care. They would allow insurers offering the

coverage to ‘‘cherry-pick’’ by tailoring benefits in a way that would limit the value

of the benefit to those with greater prescription drug needs. And they would not ensure that minimal safety protections, such as medication error prevention programs,

are in place.

CONCLUSION

The need for a prescription drug benefit in Medicare is clear. The consensus

across the political spectrum that it should be added is broad. The principles on

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which it must be based are strong. The opportunity is before us. The time to act

is now.

I look forward to working with all of you on this critical issue. I thank you for

holding this hearing, and I am happy to answer your questions.

Mr. BILIRAKIS. Thank you, Ms. Washington. Dr. Hoadley, would

you like to add anything.

Mr. HOADLEY. Not at this point.

Mr. BILIRAKIS. Dr. Scanlon, please proceed, sir.

STATEMENT OF WILLIAM J. SCANLON

Mr. SCANLON. Thank you very much, Mr. Chairman and members of the committee. I am very pleased to be here as you discuss

options to increase Medicare beneficiaries’ access to prescription

drugs.

There has been growing concern about the gap in the Medicare

program created by the lack of outpatient prescription drug coverage, a gap which may leave some of Medicare’s most vulnerable

beneficiaries unable to afford needed drugs or heavily burdened by

their cost. While you have heard today much of the statistics that

are in our testimony about the lack of coverage for some Medicare

beneficiaries and the fragility of coverage from others, I would like

to add one fact that I think illustrates some of the tradeoffs that

you have heard about in terms of being able to afford drugs or to

afford the other necessities of life, a tradeoff that has consequences

for one’s health potentially.

And that is that having coverage has a significant impact on

your access to drugs. Medicare beneficiaries without drug coverage

but who are sick tend to buy fewer drugs than their counterparts

with drug coverage. Research shows that beneficiaries in poor or

fair health, without coverage, spend 30 to 50 percent less on drugs

than similar beneficiaries with coverage. And that difference in

spending is considerable because, as we have also heard, beneficiaries with coverage are much more likely to be getting discounts

on the drugs that they purchase.

Potential remedies to afford greater access to prescription drugs

that have been discussed have fallen into two categories. The first

involves proposals to subsidize an insurance benefit, either through

a publicly operated program or in the form of a drug-only private

insurance policy. The second would provide access to the elderly to

discounted prices available to other purchasers.

Adding a drug benefit to Medicare, an example obviously of the

public sector approach, has probably received the most attention.

Therefore, in the rest of my oral remarks I would like to comment

on that option, though I would note at the same time that the issue

of designing and managing a public drug benefit applies equally if

the program is federally managed through Medicare or managed by

State government.

A fundamental consideration in developing a Medicare prescription drug benefit would be to make the best use of resources that

are available. If you believe that resources are limited, a first step

in that regard would be to target those resources to provide the

greatest benefit, potentially focusing assistance on lower income

beneficiaries who are not eligible for Medicaid or those with larger

catastrophic drug expenses.

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A second major concern will be how to ensure that the program

dollars are spent efficiently and effectively. Accomplishing this will

be challenging. Looking at the experience of other third party payers who have pursued different strategies to control their spending,

and thinking about how to apply them in a public program, illustrates some of the challenge.

The world in which the insured individuals purchase drugs at retail pharmacies, at retail prices, and then seek reimbursement, is

giving way to a world in which third party payers influence which

drug is purchased, how much is paid for it, and where it is purchased. Medicaid programs provide an example of one approach to

cost control which focuses on seeking discounted prices.

The Medicaid drug rebate program requires drug manufacturers

to give State Medicaid programs rebates for outpatient drugs based

on the lowest or best prices that they charge other purchasers.

While effective in securing the Medicaid programs billions in rebates, the impact of these discounts on the pharmaceutical market

needs to be noted. Manufacturers’ adjustments of prices and discounts following the introduction of Medicaid rebates meant that

other payers faced higher prices.

The Medicaid rebate approach has not included techniques included by other payers to limit spending by exercising controls on

utilization. These other payers, including private insurers and

Medicare+Choice plans, have sought to manage their drug benefits

by attempting to control and channel drug utilization through the

use of formularies and cost sharing. These mechanisms not only

contribute to controlling use, but they also allow payers to concentrate purchases on selected drugs and thereby use purchasing

power to obtain even greater discounts from manufacturers.

Adopting some of these techniques with Medicare might provide

the potential for better control of costs. However, how to adapt

them to deal with the unique characteristics and enormity of the

Medicare program raises many questions.

I would like to end my comments by broadening the discussion

a bit. Adding a drug benefit to Medicare is correctly seen as a modernization of the Medicare benefit package and program. But however we feel, you also need to recognize there are other and bigger

challenges to modernizing Medicare. That is to make sure it is sufficient and sustainable to serve the needs of the baby boom and future generations of beneficiaries, and that we can satisfy other social needs and preferences.

We are in a period of prosperity. The deficit has evaporated. Surpluses are projected for the next 10 years. The growth of Medicare

spending has temporarily abated. But, nevertheless, we face substantial challenges brought about by demographics.

The baby boom generation will add approximately 30 million to

Medicare rolls by 2030. While those numbers alone might imply

huge increases in spending, the likely improvements in medical

service that all will want access to will also create additional pressure.

We have been aware of the financial pressures facing Medicare.

However, they have been discussed most often in terms of the solvency of the Hospital Insurance, HI, Trust Fund. We need to

broaden our focus. HI Trust Fund solvency is an issue. As the

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1M.E. Gluck, National Academy of Social Insurance Medicare Brief: A Medicare Prescription

Drug Benefit (April 1999), p. 8. http//www.nasi.org/Medicare.medbr1.htm (4/22/99).

graphic over there indicates, the fund will be depleted about the

year 2014. Indeed, for the majority of the 1990’s there were outflows from that fund every year.

The HI Trust Fund, however, is only a part of the picture. It

funds Part A. Part B coverage of physicians and other services is

almost 40 percent of the program, and it is funded 75 percent out

of general revenues. Thus, we need to focus on the full share of our

resources that will be needed by Medicare.

As this next graphic shows, Medicare, Medicaid and Social Security will absorb increasing shares of Gross Domestic Product and

Federal revenues this century. Indeed, if Federal revenues were to

remain at a constant share of GDP, by 2030 these entitlements will

be crowding out some discretionary spending like defense or education. By 2050, all discretionary spending would be crowded out,

as would some interest on the debt.

This picture means that prudence demands that we focus broadly

on Medicare and not just on the absence of prescription drug coverage. We should be making every effort to ensure needed services

are purchased efficiently, that the burden of financing is distributed equitably, and that the program remains sustainable and affordable for future generations.

Thank you very much, Mr. Chairman.

[The prepared statement of William J. Scanlon follows:]

PREPARED STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE

UNITED STATES

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today

as you discuss options for increasing Medicare beneficiaries’ access to prescription

drugs. There are growing concerns about gaps in the Medicare program, most notably the lack of outpatient prescription drug coverage, which may leave Medicare’s

most vulnerable beneficiaries with high out-of-pocket costs that they may not be

able to afford. In 1996, almost a third of Medicare beneficiaries lacked prescription

drug coverage. The remaining two-thirds had at least some drug coverage through

other sources—most commonly employer-sponsored health plans. Although the proportion of beneficiaries who had drug coverage rose between 1995 and 1996, recent

evidence indicates that this trend of expanding drug coverage is unlikely to continue. Moreover, the burden of prescription drug costs falls most heavily on the

Medicare beneficiaries who lack drug coverage or those who have substantial health

care needs. In 1999, an estimated 20 percent of Medicare beneficiaries had drug

costs of $1,500 or more—a substantial sum for those lacking some form of insurance

to subsidize the purchase.

At the same time, however, long-term cost pressures facing the Medicare program

are considerable. There appears to be an emerging consensus that substantive financing and programmatic reforms are necessary to put Medicare on a sustainable

footing for the future. These fundamental program reforms are vital to reducing the

program’s growth, which threatens to absorb ever-increasing shares of the nation’s

budgetary and economic resources. Thus, proposals to help seniors with the costs

of prescription drugs should be carefully crafted to avoid further erosion of the projected financial condition of the Medicare program, which, according to its trustees,

is already unsustainable in its present form.

On the one hand, you must grapple with the hard choices involved in making the

Medicare program sustainable for future generations. On the other, you are faced

with the plight of many seniors who cannot afford the medical miracles that may

be achieved through access to pharmaceutical advances. Expanding Medicare’s benefit package could address the latter. However, a recent study suggests that such

an expansion could add between 7.2 and 10 percent annually to Medicare’s costs.1

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2S. 1895, Medicare Preservation and Improvement Act of 1999.

Increased spending of that magnitude would only exacerbate the tough choices that

will be required to put Medicare on sustainable footing for the future.

You are considering these issues at a historic crossroad. After nearly 30 years of

deficits, the combination of hard choices and remarkable economic growth has led

to a budget surplus. We appear—at least for the near future—to have slain the deficit dragon. In its most recent projections, the Congressional Budget Office (CBO)

shows both unified and on-budget surpluses throughout the next 10 years. While

this is good news and even superior to the projections made last year, it does not

mean that hard choices are a thing of the past. First, it is important to recognize

that by their very nature projections are uncertain. This is especially true today because, as CBO notes, it is too soon to tell whether recent boosts in revenue reflect

a major structural change in the economy or a more temporary divergence from historical trends. Indeed, CBO points out that assuming a return to historical trends

and slightly faster growth in Medicare would change the on-budget surplus to a

growing deficit. This means we should treat surplus predictions with caution. Current projected surpluses could well prove to be fleeting, and thus appropriate caution should be exercised when creating new entitlements that establish permanent

claims on future resources.

Moreover, while the size of future surpluses could exceed or fall short of projections, we know that demographic and cost trends will, in the absence of meaningful

reform, drive Medicare spending to levels that will prove unsustainable for future

generations of taxpayers. Accordingly, we need to view this period of projected prosperity as an opportunity to address the structural imbalances in Medicare, Social

Security, and other entitlement programs before the approaching demographic tidal

wave makes the imbalances more dramatic and possible solutions more painful.

As the foregoing suggests, the stakes associated with Medicare reform are high

for the program itself and for the rest of the federal budget, both now and for future

generations. Current policy decisions can help us prepare for the challenges of an

aging society in several important ways: (1) reducing public debt to increase national savings and investment, (2) reforming entitlement programs to reduce future

claims and free up resources for other competing priorities, and (3) establishing a

more sustainable Medicare program that delivers effective and affordable health

care to our seniors.

My remarks today will focus on Medicare beneficiaries’ access to prescription

drugs and the environment in which you consider increasing that access. Two proposals before you, one offered in the President’s budget and the other contained in

the Breaux-Frist bill,2 would incorporate Medicare prescription drug coverage in the

context of larger Medicare reform. Other proposals that focus only on increasing access to affordable prescription drugs are also being considered. These proposals

would either subsidize prescription drug coverage or lower prices faced by beneficiaries without coverage. To put these proposals in context, I will discuss the factors contributing to the growth in prescription drug spending and efforts to control

that growth. I will also discuss design and implementation issues to be considered

regarding proposals to improve seniors’ access to affordable prescription drugs. I

then will repeat my message about the Medicare program’s current financial condition and its long term sustainability.

But before I turn to the specifics, let me reiterate that although people want unfettered access to health care, and some have needs that are not being met, health

care costs compete with other legitimate priorities in the federal budget, and their

projected growth threatens to crowd out future generations’ flexibility to decide

which of these competing priorities will be met. Thus, in making important fiscal

decisions for our nation, policymakers need to consider the fundamental differences

between wants, needs, and what both individuals and our nation can afford. This

concept applies to all major aspects of government, from major weapons system acquisitions to issues affecting domestic programs. It also points to the fiduciary and

stewardship responsibility that we all share to ensure the sustainability of Medicare

for current and future generations within a broader context of also providing for

other important national needs and economic growth. We have an opportunity to

use our unprecedented economic wealth and fiscal good fortune to address today’s

needs but an obligation to do so in a way that improves the prospects for future

generations. This generation has a responsibility to future generations to reduce the

debt burden they will inherit, to provide a strong foundation for future economic

growth, and to ensure that future commitments are both adequate and affordable.

Prudence requires making the tough choices today while the economy is healthy and

the workforce is relatively large.

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3 As an alternative to traditional Medicare fee-for-service, beneficiaries in Medicare+Choice

plans (formerly Medicare risk health maintenance organizations) obtain all their services

through a managed care organization and Medicare makes a monthly capitation payment to the

plan on their behalf. 4 Barents Group LLC for the National Institute for Health Care Management Research and

Educational Foundation, Factors Affecting the Growth of Prescription Drug Expenditures (July

9, 1999);, p. iii.

RISING DRUG SPENDING ELEVATES BENEFICIARY ACCESS CONCERNS AND THE

IMPORTANCE OF COST-CONTROL EFFORTS

Extensive research and development over the past 10 years have led to new prescription drug therapies and improvements over existing therapies that, in some instances, have replaced other health care interventions. For example, new medications for the treatment of ulcers have virtually eliminated the need for some surgical treatments. As a result of these innovations, the importance of prescription

drugs as part of health care has grown. However, the new drug therapies have also

contributed to a significant increase in drug spending as a component of health care

costs. The Medicare benefit package, largely designed in 1965, provides virtually no

coverage. In 1996, almost one third of beneficiaries had employer-sponsored health

coverage, as retirees, that included drug benefits. More than 10 percent of beneficiaries received coverage through Medicaid or other public programs. To protect

against drug costs, the remainder of Medicare beneficiaries can choose to enroll in

a Medicare+Choice plan with drug coverage if one is available in their area or purchase a Medigap policy.3 The availability, breadth, and price of such coverage is

changing as the costs of expanded prescription drug use drives employers, insurers,

and managed care plans to adopt new approaches to control the expenditures for

this benefit. These approaches, in turn, are reshaping the drug market.

Rise in Prescription Drug Spending

Over the past 5 years, prescription drug expenditures have grown substantially,

both in total and as a share of all health care outlays. Prescription drug spending

grew an average of 12.4 percent per year from 1993 to 1998, compared with a 5 percent average annual growth rate for health care expenditures overall. (See table 1.)

As a result, prescription drugs account for a larger share of total health care spending—rising from 5.6 percent to 7.9 percent in 1998.

Table 1: National Expenditures for Prescription Drugs, 1993-98

Year

Prescription drug

expenditures

(in billions)

Annual growth in

prescription drug

expenditures

(percent)

Annual growth in

all health care

expenditures

(percent)

1998 ............................................................................................................ $90.6 15.4 5.6

1997 ............................................................................................................ $78.5 14.0 4.7

1996 ............................................................................................................ $68.9 12.9 4.6

1995 ............................................................................................................ $61.0 10.6 4.8

1994 ............................................................................................................ $55.2 9.0 5.5

1993 ............................................................................................................ $50.6 8.7 7.4

Average annual growth between 1993 and 1998 .................................................................. 12.4 5.0

Source: Health Care Financing Administration (HCFA), Office of the Actuary.

Total drug expenditures have been driven up by both greater utilization of drugs

and the substitution of higher-priced new drugs for lower-priced existing drugs. Private insurance coverage for prescription drugs has likely contributed to the rise in

spending, because insured consumers are shielded from the direct costs of prescription drugs. In the decade between 1988 and 1998, the share of prescription drug

expenditures paid by private health insurers rose from almost a third to more than

half. (See fig. 1.) The development of new, more expensive drug therapies—including

new drugs that replace old drugs and new drugs that treat disease more effectively—also contributed to the drug spending growth by boosting the volume of

drugs used as well as the average price for drugs used. The average number of new

drugs entering the market each year rose from 24 at the beginning of the 1990s to

33 now. Similarly, biotechnology advances and a growing knowledge of the human

immune system are significantly shaping the discovery, design, and production of

drugs. Advertising pitched to consumers has also likely upped the use of prescription drugs. A recent study found that the 10 drugs most heavily advertised directly

to consumers in 1998 accounted for about 22 percent of the total increase in drug

spending between 1993 and 1998.4 Between March 1998 and March 1999, industry

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5M. Davis and others, ‘‘Prescription Drug Coverage, Utilization, and Spending Among Medicare Beneficiaries,’’ Health Affairs, Vol. 18, No. 1 (Jan./Feb. 1999);, p. 237. 6M. Davis, p. 239.

7 Agency for Health Care Policy and Research Center for Cost and Financing Studies, National

Medical Expenditure Survey data, Trends in Personal Health Care Expenditures, Health Insurance, and Payment Sources, Community-Based Population, 1987-1995 (Mar. 1997), p. 10. http:/

/www.meps.ahcpr.gov/nmes/papers/trends/intnet4d.pdf (6/10/99). 8 J.A. Poisal and others, ‘‘Prescription Drug Coverage and Spending for Medicare Beneficiaries,’’ Health Care Financing Review, Vol. 20, No. 3 (Spring 1999), p. 20. 9M.E. Gluck, p. 2.

spending on advertising grew 16 percent to $1.5 billion. All of these factors suggest

the need for effective cost control mechanisms to be in place under any option to

increase access to prescription drugs.

Figure 1: Comparison of National Outpatient Drug Expenditures, 1988 and 1998

Note: Out-of-pocket expenditures include direct spending by consumers for prescription drugs,

such as coinsurance, deductibles, and any amounts not covered by insurance. Out-of-pocket premiums paid by individuals are not counted here.

Source: HCFA, Office of the Actuary.

Current Medicare Beneficiary Drug Coverage

Prescription drugs are an important component of medical care for the elderly because of the prevalence of chronic and other health conditions associated with aging.

In 1995, Medicare beneficiaries had an average of more than 18 prescriptions filled.5

This varies substantially across beneficiaries, however, reflecting the range of their

needs and also financial considerations such as third-party prescription drug coverage. In 1995, an elderly person’s total average annual drug costs were $600 6 compared with a little more than $140 for a non-elderly persons.7 For some, prescription

drug spending was considerably higher—6 percent of Medicare beneficiaries spent

$2,000 or more.8 A recent report had projected that by 1999 an estimated 20 percent

of Medicare beneficiaries would have total drug costs of $1,500 or more—a substantial sum for people lacking some form of insurance to subsidize their purchases or

for those facing coverage limits. 9

In 1996, almost a third of Medicare beneficiaries lacked drug coverage altogether.

(See fig. 2.) The remaining two-thirds had at least some drug coverage—most commonly through employer-sponsored health plans. The proportion of beneficiaries who

had drug coverage rose between 1995 and 1996, owing to increases in those with

Medicare HMOs, individually purchased supplemental coverage, and employer-sponsored coverage. However, recent evidence indicates that this trend of expanding

drug coverage is unlikely to continue.

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10 Certain low-income Medicare beneficiaries are dually eligible for Medicare and Medicaid. 11These programs are operated in New Jersey, New York, and Pennsylvania.

Figure 2: Sources of Drug Coverage for Medicare Beneficiaries, 1996

‘‘All Other’’ includes coverage under non-risk Medicare HMOs, state-based plans, the Department of Defense, and the Department of Veterans Affairs.

Source: HCFA, based on the 1996 Medicare Current Beneficiary Survey.

Although employer-sponsored health plans provide drug coverage to the largest

segment of the Medicare population with coverage, there are signs that this could

be eroding. Fewer employers are offering health benefits to retirees eligible for

Medicare and those that continue to offer coverage are asking retirees to pay a larger share of costs. The proportion of employers offering health coverage to retirees

eligible for Medicare declined from 40 percent in 1993 to 28 percent in 1999. This

decline is at least in part due to the rise in the cost of providing this coverage,

which grew about 21 percent from 1993 to 1999. At the same time, the proportion

of employers asking retirees to pay the full cost of their health coverage increased

from 36 percent to 40 percent.

In 1999, 13 percent of Medicare beneficiaries obtained prescription drug coverage

through a Medicare+Choice plan, up from 8 percent in 1996. Medicare+Choice plans

have found drug coverage to be an attractive benefit that beneficiaries seek out

when choosing to enroll in managed care organizations. However, owing to rising

drug expenditures and their effect on plan costs, the drug benefits the plans offer

are becoming less generous. Many plans restructured drug benefits in 2000, increasing enrollees’ out-of-pocket costs and limiting their total drug coverage.

Beneficiaries may purchase Medigap policies that provide drug coverage, although

this tends to be expensive, involves significant cost-sharing, and includes annual

limits. Standard Medigap drug policies include a $250 deductible, a 50 percent coinsurance requirement, and a $1,250 or $3,000 annual limit. Furthermore, Medigap

premiums have been increasing in recent years. In 1999, the annual premium for

one type of Medigap policy with a $1,250 annual limit on drug coverage, ranged

from approximately $1,000 to $6,000.

All beneficiaries who have full Medicaid benefits 10 receive drug coverage that is

subject to few limits and low cost-sharing requirements. For beneficiaries whose incomes are slightly higher than Medicaid standards, 14 states currently offer pharmacy assistance programs that provided drug coverage to approximately 750,000

beneficiaries in 1997. The three largest state programs accounted for 77 percent of

all state pharmacy assistance program beneficiaries. 11 Most state pharmacy assistance programs, like Medicaid, have few coverage limitations.

The burden of prescription drug costs falls most heavily on the Medicare beneficiaries who lack drug coverage or who have substantial health care needs. Drug

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coverage is less prevalent among beneficiaries with lower incomes. In 1995, 38 percent of beneficiaries with income below $20,000 were without drug coverage, compared to 30 percent of beneficiaries with higher incomes. Additionally, the 1995 data

show that drug coverage is slightly higher among those with poorer self-reported

health status. At the same time, however, beneficiaries without drug coverage and

in poor health had drug expenditures that were $400 lower than the expenditures

of beneficiaries with drug coverage and in poor health. This might indicate access

problems for this segment of the population.

Even for beneficiaries who have drug coverage, the extent of the protection it affords varies. The value of a beneficiary’s drug benefit is affected by the benefit design, including cost-sharing requirements and benefit limitations. Evidence suggests

that premiums are on the rise for employer-sponsored benefits, Medigap policies,

and most recently, Medicare+Choice plans. Although reasonable cost sharing serves

to make the consumer a more prudent purchaser, copayments, deductibles, and annual coverage limits can reduce the value of drug coverage to the beneficiary. Harder to measure is the effect on beneficiaries of drug benefit restrictions brought about

through formularies designed to limit or influence the choice of drugs.

Cost-Control Approaches Are Reshaping the Pharmaceutical Market

During this period of rising prescription drug expenditures, third-party payers

have pursued various approaches to control spending. These efforts have initiated

a transformation of the pharmaceutical market. Whereas insured individuals formerly purchased drugs at retail prices at pharmacies and then sought reimbursement, now third-party payers influence which drug is purchased, how much is paid

for it, and where it is purchased.

A common technique to manage pharmacy care and control costs is to use a formulary. A formulary is a list of prescription drugs, grouped by therapeutic class,

that a health plan or insurer prefers and may encourage doctors to prescribe. Decisions about which drugs to include in a formulary are based on the drugs’ medical

value and price. The inclusion of a drug in a formulary and its cost can affect how

frequently it is prescribed and purchased and, therefore, can affect its market share.

Formularies can be open, incentive-based, or closed. Open formularies are often

referred to as ‘‘voluntary’’ because enrollees are not penalized if their physicians

prescribe nonformulary drugs. Incentive-based formularies generally offer enrollees

lower copayments for the preferred formulary or generic drugs. Incentive-based or

managed formularies are becoming more popular because they combine flexibility

and greater cost-control features than open formularies. A closed formulary limits

insurance coverage to the formulary drugs and requires enrollees to pay the full cost

of nonformulary drugs prescribed by their physicians.

Another way in which the market has been transformed is through the use of

pharmacy benefit managers (PBM) by health plans and insurers to administer and

manage prescription drug benefits. PBMs offer a range of services, including prescription claims processing, mail-service pharmacy, formulary development and

management, pharmacy network development, generic substitution incentives, and

drug utilization review. PBMs also negotiate discounts and rebates on prescription

drugs with manufacturers.

EXPANDING ACCESS TO PRESCRIPTION DRUGS INVOLVES DIFFICULT DESIGN DECISIONS

Expanding access to more affordable prescription drugs could involve either subsidizing prescription drug coverage or allowing beneficiaries access to discounted

pharmaceutical prices. The design of a drug coverage option, that is, the scope of

the benefit, the covered population, and the mechanisms used to contain costs, as

well as its implementation will determine the effect of the option on beneficiaries,

Medicare or federal spending, and the pharmaceutical market. A new benefit would

need to be crafted to balance competing concerns about the sustainability of Medicare, federal obligations, and the hardship faced by some beneficiaries. Similarly,

the effect of granting some beneficiaries access to discounted prices will hinge on

details such as the price of the drugs after the discount, how discounts are determined and secured, and which beneficiaries are eligible.

The relative merits of any approach should be carefully assessed. We suggest that

the following five criteria be considered in evaluating any option. (1) Affordability:

an option should be evaluated in terms of its effect on public outlays for the long

term. (2) Equity: an option should provide equitable access across groups of beneficiaries and be fair to affected providers. (3) Adequacy: an option should provide

appropriate beneficiary incentives for prudent utilization, support standard treatment options for beneficiaries, and not impede effective and clinically meaningful innovations. (4) Feasibility: an option should incorporate such administrative essentials as implementation and cost and quality monitoring techniques. (5) Acceptance:

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12OBRA 1990 allowed the states to exclude certain classes of drugs.

an option should account for the need to educate the beneficiary and provider communities about its costs and the realities of trade-offs required by significant policy

changes.

Adding a Medicare Benefit

Expanding Medicare coverage to include prescription drugs would entail numerous benefit design decisions that would affect the cost of this expansion as well as

its acceptability. A basic design decision concerns whether financial assistance provided for the benefit would be targeted to those with the greatest need—owing to

a lack of existing drug coverage, high drug expenditures, or poverty—or whether the

public financial subsidies would be available to all beneficiaries. The President’s

proposal extends coverage to all beneficiaries, with greater government subsidies for

the poor. The Breaux-Frist Medicare reform proposal incorporates optional drug coverage, which is subsidized fully for the poor and partially for others. The generosity

of the benefit—the extent of beneficiary copayments, coverage limits, and catastrophic protections—will also be a major factor in assessing the impact of this benefit on the Medicare program. The President’s benefit design incorporates 50 percent

beneficiary copayments; an annual benefit limit; and a cap on catastrophic drug

costs, which is yet to be designed. Under the Breaux-Frist approach, competing

health plans could design their own copayment structure, with requirements on the

benefit’s actuarial value but no provision to limit beneficiary catastrophic drug costs.

Benefit cost-control provisions for the traditional Medicare program may present

some of the thorniest drug benefit design decisions. Recent experience provides two

general approaches. One would involve the Medicare program obtaining price discounts from manufacturers. Such an arrangement could be modeled after Medicaid’s

drug rebate program. While the discounts in aggregate would likely be substantial,

this approach lacks the flexibility to achieve the greatest control over spending. It

could not effectively influence or steer utilization because it does not include incentives that would encourage beneficiaries to make cost-conscious decisions. The second approach would draw from private sector experience in negotiating price discounts from manufacturers in exchange for shifting market share. Some plans and

insurers employ PBMs to manage their drug benefits, including claims processing,

negotiating with manufacturers, establishing lists of drug products that are preferred because of efficacy or price, and developing beneficiary incentive approaches

to control spending and use. Applying these techniques to the entire Medicare program, however, would be difficult because of its size, the need for transparency in

its actions, and the imperative for equity for its beneficiaries.

Medicaid Programs Rely on Rebates and Have Limited Utilization Controls

As the largest government payer for prescription drugs, Medicaid drug expenditures account for about 17 percent of the domestic pharmaceutical market. Before

the enactment of the Medicaid drug rebate program under the Omnibus Budget Reconciliation Act of 1990 (OBRA), state Medicaid programs paid close to retail prices

for outpatient drugs. Other large purchasers, such as HMOs and hospitals, negotiated discounts with manufacturers and paid considerably less.

The rebate program required drug manufacturers to rebate to state Medicaid programs a percentage off of the average price wholesalers pay manufacturers. The rebates were based on a percentage reduction that reflects the lowest or ‘‘best’’ prices

the manufacturer charged other purchasers and the volume of purchases by Medicaid recipients. In return for the rebates, state Medicaid programs must cover all

drugs manufactured by pharmaceutical companies that entered into rebate agreements with HCFA.12

After the rebate program’s enactment, a number of market changes affected other

purchasers of prescription drugs and the amount of the rebates that Medicaid programs received. Drug manufacturers substantially reduced the price discounts they

offered to many large private purchasers, such as HMOs. Therefore, the market

quickly adjusted by increasing drug prices to compensate for rebates obtained by the

Medicaid program.

Although the states have received billions of dollars in rebates from drug manufacturers since OBRA’s enactment, state Medicaid directors have expressed concerns

about the rebate program. The principal concern involves OBRA’s requirement to

provide access to all the drugs of every manufacturer that offers rebates, which limits the utilization controls Medicaid programs can use at a time when prescription

drug expenditures are rapidly increasing. Although the programs can require recipients to obtain prior authorization for particular drugs and can impose monthly limits on the number of covered prescriptions, they cannot take advantage of other

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techniques, such as incentive-based formularies, to steer recipients to less expensive

drugs. The few cost-control strategies available to state Medicaid programs can add

to the administrative burden on state Medicaid programs.

Other Payers Employ Various Techniques to Control Expenditures

Other payers, such as private and federal employer health plans and

Medicare+Choice plans, have taken a different approach to managing their prescription drug benefits. They typically use beneficiary copayments to control prescription

drug use, and they use formularies to both control use and obtain better prices by

concentrating purchases on selected drugs. In many cases, these plans and insurers

retain a PBM’s services to manage their pharmacy benefit and control spending.

Beneficiary cost-sharing plays a central role in attempting to influence drug utilization. Copayments are frequently structured to influence both the choice of drugs

and the purchasing arrangements. While formulary restrictions can channel purchases to preferred drugs, closed formularies, which provide reimbursement only for

preferred drugs, have generated substantial dissatisfaction among consumers. As a

result, many plans link their cost-sharing requirements and formulary lists. The

fastest growing trend today is the use of a formulary that covers all drugs but that

includes beneficiary cost-sharing that varies for different drugs—typically a smaller

copayment for generic drugs, a larger one for preferred drugs, and an even larger

one for all other drugs. Reduced copayments have also been used to encourage enrollees using maintenance drugs for chronic conditions to obtain them from particular suppliers, like a mail-order pharmacy.

Plans and insurers have turned to PBMs for assistance in establishing

formularies, negotiating prices with manufacturers and pharmacies, processing

beneficiaries’ claims, and reviewing drug utilization. Because PBMs manage drug

benefits for multiple purchasers, they often may have more leverage than individual

plans in negotiating prices through their greater purchasing power.

Traditional fee-for-service Medicare has generally established reimbursement

rates for services like those provided by physicians and hospitals and then processed

and paid claims with few utilization controls. Adopting some of the techniques used

by private plans and insurers might help better control costs. However, how to

adapt those techniques to the characteristics and size of the Medicare program

raises questions.

Negotiated or competitively determined prices would be superior to administered

prices only if Medicare could employ some of the utilization controls that come from

having a formulary and differential beneficiary cost-sharing. In this manner, Medicare would be able to negotiate significantly discounted prices by promising to deliver a larger market share for a manufacturer’s product. Manufacturers would have

no incentive to offer a deep discount if all drugs in a therapeutic class were covered

on the same terms. Without a promised share of the Medicare market, these manufacturers might reap greater returns from charging higher prices and by concentrating marketing efforts on physicians and consumers to influence prescribing patterns.

Implementing a formulary and other utilization controls could prove difficult for

Medicare. Developing a formulary involves determining which drugs are therapeutically equivalent so that several from each class can be included. Plans and PBMs

currently make those determinations privately—something that would not be possible for Medicare, which must have transparent policies that are determined openly. Given the stakes involved in selecting drugs, one can imagine the intensive efforts to offer input to and scrutinize the selection process.

Medicare may also find it impossible to delegate this task to one or multiple

PBMs. A single PBM contractor would likely be subject to the same level of scrutiny

as the program. Such scrutiny could compromise the flexibility PBMs have used to

generate savings. An alternative would be to grant flexibility to multiple PBMs that

are each responsible only for a share of the market. Contracting with multiple

PBMs, though, raises other issues. If each PBM has exclusive responsibility for a

geographic area, beneficiaries who need certain drugs could be advantaged or disadvantaged merely because of where they live. If multiple PBMs operated in each

area, beneficiaries could choose one to administer their drug benefit. This raises

questions about how to inform beneficiaries of the differences in each PBM’s policies

and whether and how to risk-adjust payments to PBMs for differences in the health

status of the beneficiaries using them.

Extending Federal Price Discounts to Beneficiaries

Another option before the Congress would allow Medicare beneficiaries to purchase prescription drugs at the lowest price paid by the federal government. Because of their large purchasing power, federal agencies, such as, the Departments

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13The FSS for pharmaceuticals is a price catalog currently containing over 17,000 pharmaceutical products available to federal agencies. 14FSS prices are set through negotiations between VA, on behalf of the government, and drug

manufacturers and are based on the prices that manufacturers offer their most favored nonfederal customers. 15The act covers single-source drugs, innovator multiple-source drugs, insulin, and biological

products such as vaccines and antitoxins. The act does not cover noninnovator multiple-source

or generic drugs. 16The act requires that manufacturers sell drugs covered by the act at no more that 76 percent of the nonfederal average manufacturer’s price, a level referred to as the federal ceiling

price. The nonfederal average manufacturer’s price is the weighted average price of each single

form and dosage unit of a drug that is paid by wholesalers in the United States to a manufacturer, taking into account any cash discounts or similar price reductiions. Prices paid by the

federal government are excluded from this calculation.

of Veterans Affairs (VA) and Defense (DOD), have access to prescription drug prices

that often are considerably lower than retail prices. Extending these discounts to

Medicare beneficiaries, or some groups of beneficiaries, could have a measurable effect on lowering their out-of-pocket spending, although whether this would adequately increase access or raise prices paid by other purchasers that negotiate drug

discounts is unknown.

Typically, federal agencies obtain prescription drugs at prices listed in the federal

supply schedule (FSS) for pharmaceuticals.13 FSS prices represent a significant discount off the prices drug manufacturers charge wholesalers.14 Under the Veterans

Health Care Act of 1992, drug manufacturers must make their brand-named drugs

available to federal agencies at the FSS price in order to participate in the Medicaid

program. 15 The act requires that the FSS price for VA, DOD, the Public Health

Service, and the Coast Guard be at least 24 percent below the price that the manufacturers charge wholesalers.16

Although most federal prescription drug purchases are made at FSS prices, in

some cases, federal agencies are able to purchase drugs at even lower prices. For

example, VA has used national contracts awarded on a competitive basis for specific

drugs considered therapeutically interchangeable. These contracts enable VA to obtain larger discounts from manufacturers by channeling greater volume to certain

pharmaceutical products.

Providing Medicare beneficiaries access to the lowest federal prices could result

in important out-of-pocket savings to those without coverage who are paying close

to retail prices. However, concerns exist that extending federal discounts to Medicare beneficiaries could lead to price increases to federal agencies and other purchasers since the discount is based on prices determined by manufacturers. Federal

efforts to lower Medicaid drug prices demonstrate the potential for this to occur.

While it is not possible to predict how federal drug prices would change if Medicare

beneficiaries are given access to them, the larger the market that seeks to take advantage of these prices, the greater the economic incentive would be for drug manufacturers to raise federal prices to limit the impact of giving lower prices to more

purchasers.

EXPANDING BENEFITS NEEDS TO BE CONSIDERED IN LIGHT OF LARGER MEDICARE

FISCAL CONCERNS

The current Medicare program, without improvements, is ill suited to serve future

generations of seniors and eligible disabled Americans. On the one hand, the program is fiscally unsustainable in its present form, as the disparity between program

expenditures and program revenues is expected to widen dramatically in the coming

years. On the other hand, Medicare’s benefit package contains gaps in desired coverage, most notably the lack of outpatient prescription drug coverage, compared

with private employer coverage. Any option to modernize the benefits runs the risk

of exacerbating the fiscal imbalance of the programs. That is why we believe that

expansions should be made in the context of overall program reforms that are designed to make the program more sustainable over the long term. Any discussions

about expanding beneficiary access to prescription drugs should carefully consider

targeting financial help to those most in need and minimizing the substitution of

public funds for private funds. Employers that offer drug coverage through a retiree

health plan may choose to adapt their health coverage if a Medicare drug benefit

is available. A key characteristic of America’s voluntary, employer-based system of

health insurance is an employer’s freedom to modify the conditions of coverage or

to terminate benefits.

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Medicare’s Financial Condition

Unlike private trust funds that can set aside money for the future by investing

in financial assets, the Medicare Hospital Insurance (HI) Trust Fund—which pays

for inpatient hospital stays, skilled nursing care, hospice, and certain home health

services—is essentially an accounting device. It allows the government to track the

extent to which earmarked payroll taxes cover Medicare’s HI outlays. In serving the

tracking purpose, the 1999 Trustees’ annual report showed that Medicare’s HI component has been, on a cash basis, in the red since 1992, and in fiscal year 1998,

earmarked payroll taxes covered only 89 percent of HI spending. In the Trustees’

report, issued in March 1999, projected continued cash deficits for the HI trust fund.

(See fig. 3.)

When the program has a cash deficit, as it did from 1992 through 1998, Medicare

is a net claimant on the Treasury—a threshold that Social Security is not currently

expected to reach until 2014. To finance these cash deficits, Medicare drew on its

special issue Treasury securities acquired during the years when the program generates a cash surplus. In essence, for Medicare to ‘‘redeem’’ its securities, the government must raise taxes, cut spending for other programs, or reduce the projected

surplus. Outlays for Medicare services covered under Supplementary Medical Insurance (SMI)--physician and outpatient hospital services, diagnostic tests, and certain

other medical services and supplies--are already funded largely through general revenues.

Although the Office of Management and Budget (OMB) has recently reported a

$12 billion cash surplus for the HI program in fiscal year 1999 due to lower than

expected program outlays, the long-term financial outlook for Medicare is expected

to deteriorate. Medicare’s rolls are expanding and are projected to increase rapidly

with the retirement of the baby boomers. Today’s elderly make up about 13 percent

of the total population; by 2030, they will comprise 20 percent as the baby boom

generation ages and the ratio of workers to retirees declines from 3.4 to 1 today to

roughly 2 to 1.

Without meaningful reform, the long-term financial outlook for Medicare is bleak.

Together, Medicare’s HI and SMI expenditures are expected to increase dramatically, rising from about 12 percent in 1999 to about a quarter of all federal revenues

by mid-century. Over the same time frame, Medicare’s expenditures are expected to

double as a share of the economy, from 2.5 to 5.3 percent, as shown in figure 4.

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The progressive absorption of a greater share of the nation’s resources for health

care, like Social Security, is in part a reflection of the rising share of elderly population, but Medicare growth rates also reflect the escalation of health care costs at

rates well exceeding general rates of inflation. Increases in the number and quality

of health care services have been fueled by the explosive growth of medical technology. Moreover, the actual costs of health care consumption are not transparent.

Third-party payers generally insulate consumers from the cost of health care decisions. In traditional Medicare, for example, the impact of the cost-sharing provisions

designed to curb the use of services is muted because about 80 percent of beneficiaries have some form of supplemental health care coverage (such as Medigap insurance) that pays these costs. For these reasons, among others, Medicare represents a much greater and more complex fiscal challenge than even Social Security

over the longer term.

When viewed from the perspective of the entire budget and the economy, the

growth in Medicare spending will become progressively unsustainable over the

longer term. Our updated budget simulations show that to move into the future

without making changes in the Social Security, Medicare, and Medicaid programs

is to envision a very different role for the federal government. Assuming, for example, that the Congress and the President adhere to the often-stated goal of saving

the Social Security surpluses, our long-term model shows a world by 2030 in which

Social Security, Medicare, and Medicaid increasingly absorb available revenues

within the federal budget. Under this scenario, these programs would absorb more

than three-quarters of total federal revenue. (See fig. 5.) Budgetary flexibility would

be drastically constrained and little room would be left for programs for national

defense, the young, infrastructure, and law enforcement.

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While the problems facing the Social Security program are significant, Medicare’s

challenges are even more daunting. To close Social Security’s deficit today would require a 17 percent increase in the payroll tax, whereas the HI payroll tax would

have to be raised 50 percent to restore actuarial balance to the HI trust fund. This

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17The Economic and Budget Outlook: Fiscal Years 2001-2010 (CBO, Jan. 2000).

analysis, moreover, does not incorporate the financing challenges associated with

the SMI and Medicaid programs.

Early action to address the structural imbalances in Medicare is critical. First,

ample time is required to phase in the reforms needed to put this program on a

more sustainable footing before the baby boomers retire. Second, timely action to

bring costs down pays large fiscal dividends for the program and the budget. The

high projected growth of Medicare in the coming years means that the earlier the

reform begins, the greater the savings will be as a result of the effects of

compounding.

The actions necessary to bring about a more sustainable program will no doubt

call for some hard choices. Some suggest that the size of the imbalances between

Medicare’s outlays and payroll tax revenues for the HI program may well justify the

need for additional resources. One possible source could be general revenues. Although this may eventually prove necessary, such additional financing should be

considered as part of a broader initiative to ensure the program’s long-range financial integrity and sustainability.

What concerns us most is that devoting general funds to the HI trust fund may

be used to extend HI’s solvency without addressing the hard choices needed to make

the whole Medicare program more sustainable in economic or budgetary terms. Increasing the HI trust fund balance alone, without underlying program reform, does

nothing to make the Medicare program more sustainable—that is, it does not reduce

the program’s projected share of GDP or the federal budget. From a macroeconomic

perspective, the critical question is not how much a trust fund has in assets but

whether the government as a whole has the economic capacity to finance all Medicare’s promised benefits—both now and in the future. We must keep in mind the

unprecedented challenge facing future generations in our aging society. Relieving

them of some of the financial burden of today’s commitments would help preserve

some budgetary flexibility for future generations to make their own choices.

If more fundamental program reforms are not made, we fear that general fund

infusions would interfere with the vital signaling function that trust fund mechanisms can have for policymakers about underlying fiscal imbalances in covered programs. The greatest risk is that dedicating general funds to the HI program will

reduce the sense of urgency that impending trust fund bankruptcy provides to policymakers by artificially extending the solvency of the HI program. Furthermore, increasing the trust fund’s paper solvency does not address cost growth in the SMI

portion of Medicare, which is projected to grow even faster than HI in coming decades, assuming no additional SMI benefits.

The issue of the extent to which general funds are an appropriate financing mechanism for the Medicare program would remain important under financing arrangements that differed from those in place in the current HI and SMI structures. For

example, under approaches that would combine the two trust funds, a continued

need would exist for measures of program sustainability that would signal potential

future fiscal imbalance. Such measures might include the percentage of program

funding provided by general revenues, the percentage of total federal revenues or

gross domestic product devoted to Medicare, or program spending per enrollee. As

such measures were developed, questions would need to be asked about the appropriate level of general revenue funding. Regardless of the measure chosen, the real

question would be what actions should be taken when and if the chosen cap is

reached.

Long-Term Fiscal Policy Choices

Beyond reforming the Medicare program itself, maintaining an overall sustainable

fiscal policy and strong economy is vital to enhancing our nation’s future capacity

to afford paying benefits in the face of an aging society. Decisions on how we use

today’s surpluses can have wide-ranging impacts on our ability to afford tomorrow’s

commitments.

As we know, there have been a variety of proposals to use the surpluses for purposes other than debt reduction. Although these proposals have various pros and

cons, we need to be mindful of the risk associated with using projected surpluses

to finance permanent future claims on the budget, whether they are on the spending

or the tax side. Commitments often prove to be permanent, while projected surpluses can be fleeting. For instance, current projections assume full compliance with

tight discretionary spending caps. Moreover, relatively small changes in economic

assumptions can lead to very large changes in the fiscal outlook, especially when

carried out over a decade. In its January 2000 report, 17 CBO compared the actual

deficits or surpluses for 1986 through 1999 with the first projection it had produced

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18See Budget Issues: Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-98-83, Feb. 25, 1998) and

Budget Issues: Analysis of Long-Term Fiscal Outlook (GAO/AIMD/OCE-98-19, Oct. 22, 1997).

5 years before the start of each fiscal year. Excluding the estimated impact of legislation, CBO stated that its errors in projecting the federal surplus or deficit averaged about 2.4 percent of GDP in the fifth year beyond the current year. For example, such a shift in 2005 would mean a potential swing of about $285 billion in the

projected surplus for that year.

Although most would not argue for devoting 100 percent of the surplus to debt

reduction over the next 10 years, saving a good portion of our surpluses would yield

fiscal and economic dividends as the nation faces the challenges of financing an

aging society. Our work on the long-term budget outlook illustrates the benefits of

maintaining surpluses for debt reduction. Reducing the publicly held debt reduces

interest costs, freeing up budgetary resources for other programmatic priorities. For

the economy, running surpluses and reducing debt increase national saving and free

up resources for private investment. These results, in turn, lead to stronger economic growth and higher incomes over the long term.

Over the last several years, our simulations illustrate the long-term economic consequences flowing from different fiscal policy paths.18 Our models consistently show

that saving all or a major share of projected budget surpluses ultimately leads to

demonstrable gains in GDP per capita. Over a 50-year period, GDP per capita is

estimated to more than double from present levels by saving all or most of projected

surpluses, while incomes would eventually fall if we failed to sustain any of the surplus. Although rising productivity and living standards are always important, they

are especially critical for the 21st century, for they will increase the economic capacity of the projected smaller workforce to finance future government programs along

with the obligations and commitments for the baby boomers’ retirement.

CONCLUDING OBSERVATIONS

Updating the Medicare benefit package may be a necessary part of any realistic

reform program to address the legitimate expectations of an aging society for health

care, both now and in the future. Expanding access to prescription drugs could ease

the significant financial burden some Medicare beneficiaries face because of outpatient drug costs. Such changes, however, need to be considered as part of a broader initiative to address Medicare’s current fiscal imbalance and promote the program’s longer-term sustainability. Balancing these competing concerns may require

the best from government-run programs and private sector efforts to modernize

Medicare for the future. Further, the Congress should consider adequate fiscal incentives to control costs and a targeting strategy in connection with any proposal

to provide new benefits such as prescription drugs.

The Congress and the President may ultimately decide to include some form of

prescription drug coverage as part of Medicare. Given this expectation and the future projected growth of the program, some additional revenue sources may in fact

be a necessary component of Medicare reform. However, it is essential that we not

take our eye off the ball. The most critical issue facing Medicare is the need to ensure the program’s long range financial integrity and sustainability. The 1999 annual reports of the Medicare Trustees project that program costs will continue to

grow faster than the rest of the economy. Care must be taken to ensure that any

potential expansion of the program be balanced with other programmatic reforms

so that we do not worsen Medicare’s existing financial imbalances.

Current budget surpluses represent both an opportunity and an obligation. We

have an opportunity to use our unprecedented economic wealth and fiscal good fortune to address today’s needs but an obligation to do so in a way that improves the

prospects for future generations. This generation has a stewardship responsibility

to future generations to reduce the debt burden they will inherit, to provide a strong

foundation for future economic growth, and to ensure that future commitments are

both adequate and affordable. Prudence requires making the tough choices today

while the economy is healthy and the workforce is relatively large. National saving

pays future dividends over the long term, but only if meaningful reform begins soon.

Entitlement reform is best done with considerable lead-time to phase in changes

and before the changes that are needed become dramatic and disruptive. The prudent use of the nation’s current and projected budget surpluses combined with

meaningful Medicare and Social Security program reforms can help achieve both of

these goals.

Mr. Chairman, this concludes my prepared statement. I will be happy to answer

any questions you or other Subcommittee Members may have.

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GAO CONTACTS AND ACKNOWLEDGMENTS

For future contacts regarding this testimony, please call Paul L. Posner, Director,

Budget Issues, at (202) 512-9573 or William J. Scanlon, Director, Health Financing

and Public Health Issues at (202) 512-7114. Other individuals who made key contributions include Linda F. Baker, Laura A. Dummit, John C. Hansen, Tricia A.

Spellman, and James R. McTigue.

Mr. BILIRAKIS. Thank you, Dr. Scanlon. Thanks to all of you.

Well, Ms. Washington, as you know, I have introduced legislation

to establish a protection for beneficiaries who have high annual

drug costs, the sickest. Even though we are talking about it being

outside of the scope of the Medicare program, at this point in time

it would include all Medicare beneficiaries who qualify, so it does

hit this universal coverage idea, by the way, which has been mentioned in the past.

The President’s budget proposed to set aside $35 billion for that

purpose. And maybe this is a little premature, and if it is, certainly

I won’t press you, but can you elaborate on the administration’s

specific plans in that regard?

Ms. WASHINGTON. Yes, sir. As you said, we agree that protecting

beneficiaries with high out-of-pocket costs is important, and it was

one of the areas that we wanted to improve on in the proposal that

we submitted last year. We don’t have a specific benefit design. We

want to work with the Congress to come up with a benefit design

that could be affordable for the program and the beneficiaries, to

protect them from some of these high out-of-pocket costs. We think

that the $35 billion that we set aside will be enough to craft a benefit that offers significant protection. But other than that, we want

to work with you on the details.

Mr. BILIRAKIS. Other than that, you have nothing.

Dr. Hoadley, do you have anything to add to that?

Mr. HOADLEY. No.

Mr. BILIRAKIS. Dr. Scanlon, add anything to it?

Mr. SCANLON. Mr. Chairman, we believe very strongly that catastrophic protection is one of the important things to think

about——

Mr. BILIRAKIS. We don’t use that word. We don’t use ‘‘catastrophic.’’

Mr. SCANLON. Sorry. Stop-loss protection. But I would also point

out that stop-loss protection for Medicare in general is also an important thing to think about, because of the two glaring omissions

from the Medicare benefit package that was enacted in 1965. Outpatient prescription drugs may be one, and beneficiaries’ cost-sharing liability, which can be quite high, is the other.

Mr. BILIRAKIS. Well, thanks. Some have suggested that enactment of targeted prescription drug assistance, not just in our plan

but any targeted prescription drug assistance, would undermine

broader reform to preserve Medicare for the future. You know, a

similar ‘‘all or nothing’’ argument was advanced during the debate

on health care reform in 1994, and then the end result was what?

Well, it was that Americans in need of health insurance were

forced to wait 2 years for enactment of legislation to provide portability of insurance and coverage for preexisting conditions.

We must not repeat that mistake, and this is why I feel so very

strongly about it. Now, you know, we have seen the charts here,

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we have talked about it previously. We all know that Medicare

faces a severe financial crisis. The impending bankruptcy of the

program, I would think, would be sufficient incentive to make sure

that regardless of whether we advance some sort of targeted prescription drug assistance, that it is not going to take away from the

need to reform Medicare consistent with all of the discussions that

have taken place.

I would like to ask all of you to comment regarding that. You

know, I represent such a strong senior citizen area. I am a big supporter of Medicare. And under perfect circumstances, whatever the

coverage might be should be universal to all Medicare beneficiaries,

but we don’t have perfect circumstances. We face the bankruptcy

of a program that we have to take into consideration as far as

spending is concerned.

You know, I just have trouble quite understanding this business

of ‘‘all or nothing’’ when in fact there are people out there who are

hurting right now who can be helped in the meantime, until we can

get to the point of reforming the system, which is going to take a

while, and in this political year many people feel that we are probably not going to be able to get around to it. I hope that they are

wrong.

So, Ms. Washington, again it is a policy issue, and I don’t know

whether it is something you want to address.

Ms. WASHINGTON. Well, I think that we agree. The President

agrees that the problem really has two parts. It is modernizing the

benefit package with prescription drugs, and it is ensuring that the

solvency of the program continues in the long run. And the President, as you know, has proposed a plan that addresses both circumstances.

I think there are particular problems for prescription drugs for

the low-income, but I believe we could work together to enact a

universal drug benefit this year. As you know, over half of the

beneficiaries who don’t have coverage do have incomes over

$150,000, and I think that part of the success of Medicare is the

fact that it is available to everyone. So I think you can work together to design——

Mr. BILIRAKIS. About half of those who don’t have—forgive me

for interrupting—who don’t have coverage have incomes of over

$150,000?

Ms. WASHINGTON. Sorry. I misspoke. 150 percent of poverty,

which is about $17,000 for a couple. I got 150 and then I got sidetracked.

Mr. BILIRAKIS. You had the figure right, at least, right?

Ms. WASHINGTON. But I think we can work together to do a universal benefit this year, affordable to both the beneficiaries and the

program.

Mr. BILIRAKIS. Don’t we wish that were truly the case, though?

Dr. Scanlon, my time has expired, but if you have anything——

Mr. SCANLON. But Chairman, I am afraid I can’t offer you much

advice on this decision. I think as the role of the analyst, what we

can do is provide you the elements of the bigger picture. And I recognize that sometimes incremental approaches are easier to accomplish in the short term, but keeping the focus on the bigger picture

and knowing how the incremental strategy will build to be able to

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deal with that broader question I think is very important. There

is no debate that resources are a portion of this question, and it

is your decision as to how those can be used best.

Mr. BILIRAKIS. Well, thank you for all the help that we always

get from GAO.

Mr. Waxman?

Mr. WAXMAN. Thank you very much, Mr. Chairman.

Ms. Washington, just so we understand how severe this problem

is of prescription drugs for the elderly, as I understand it, only

about half the beneficiaries have coverage throughout the year. Is

that an accurate statement?

Ms. WASHINGTON. That is right.

Mr. WAXMAN. And that coverage is not dependable. Employers

are cutting back. Managed care plans are cutting back if not eliminating drug coverage. And then the Medigap policies are very, very

costly. Some people just can’t afford a Medigap policy.

Ms. WASHINGTON. Right. That is true.

Mr. WAXMAN. Since the administration testified last year on this

issue in September, I believe you have gotten some new information about what is happening in managed care plans with respect

to the drug coverage they offer. Are managed care drug benefits expanding or shrinking?

Ms. WASHINGTON. Unfortunately, Congressman Waxman, managed care drug benefits are shrinking. This year, 70 percent of the

plans are capping their drug benefit at or below $1,000 for the

year, and of those, one-third of total plans cap benefits at $500 or

lower. This last figure has increased by 50 percent from the previous year, 1999.

Mr. WAXMAN. So we have large numbers of seniors without prescription drug coverage or with undependable coverage. It seems to

me that we are in the same situation with regard to drug coverage

that we were in 1965 with respect to hospitalization coverage,

which drove government to enact the Medicare program, primarily

to cover hospital care because seniors just couldn’t afford it and

didn’t have it available to them. Is that an accurate statement?

Ms. WASHINGTON. That is right, sir. Approximately 50 percent of

people in 1963 had access to hospital insurance, and that is about

where we are with Medicare drug coverage today.

Mr. WAXMAN. Now, Dr. Scanlon, in 1963, 1964 and then 1965,

the Congress could have said there is a bigger picture, and therefore we shouldn’t solve this problem until we deal with the bigger

picture. That could have kept the Congress from doing anything,

couldn’t it? That is just sort of a rhetorical question.

Mr. SCANLON. I can’t give you the details. I know. I can’t give

you the details of the bigger picture then, but I think that our picture now is quite different than it was in 1965. Medicare has absorbed a much larger share of our economy than it did in 1965, and

I think that in 1965 we would have certainly included drug coverage if we had recognized the role that drugs were going to play

in medical care.

But the reality was that medical care was so different then, and

that was in part how we approached Medicare. I think over time

we have refined Medicare dramatically to reflect the fact that medVerDate 11-MAY-2000 13:23 Jul 12, 2000 Jkt 064041 PO 00000 Frm 00122 Fmt 6633 Sfmt 6602 E:\HEARINGS\62971 pfrm07 PsN: 62971
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ical science and the delivery of medical care has changed quite a

bit.

Mr. WAXMAN. You would think, then, an insurance program for

seniors in this country ought to have prescription drugs?

Mr. SCANLON. If we were designing an insurance program today,

it should have prescription drug coverage. Virtually the entire elderly population uses some drugs. Those that are going to end up

with catastrophically high drug costs are a smaller segment and

you don’t necessarily have the ability to plan for that or have the

ability to save for that. That’s why having insurance is an extremely positive benefit for beneficiaries.

Mr. WAXMAN. We could have taken that approach with Medicare

in 1965 and said, well, just cover catastrophic costs for hospitalization and doctor expenses, and let people figure if they can come up

with the money before they get that coverage triggered in, couldn’t

we?

Mr. SCANLON. I am not saying that we should have only a catastrophic drug benefit. I think because of catastrophic costs, a drug

benefit is extremely important. Having a drug benefit that begins

at a lower level is also important to prevent the exacerbation of

conditions, so that you do not incur other kinds of higher expenses.

I think it is also important, though, that there be a sharing of the

burden of this benefit.

Mr. WAXMAN. Well, we want to share the burden, so we want to

get as many people covered as possible in any kind of voluntary

prescription drug government program, wouldn’t we? You would

agree that if we are going to do it, we should do it for all Medicare

beneficiaries, not just the 150 percent of poverty level?

Mr. SCANLON. I think that the decision as to whether you do it

for all Medicare beneficiaries is one that you have to base on resources, and this use versus other uses of those resources, and that

I think is a decision we can’t make at GAO for you.

Mr. WAXMAN. I have seen articles with headlines that say ‘‘GAO

Says Don’t Provide A Prescription Drug Coverage Under Medicare

Until All Of Medicare Is Modernized.’’ Is that a recommendation or

just a reporter’s interpretation of what your statements have been?

Mr. SCANLON. I think those are reporters’ interpretations out of

context, because the GAO position has been that we should think

about modernizing the Medicare program in its totality. Prescription drug coverage is one aspect of it. Stop-loss coverage is another.

Making the purchases of all services more efficient is a third. And

I think those are the major principles of GAO’s position on this.

Mr. WAXMAN. So we have lots of tradeoffs, but ultimately it is

up to the elected officials to make the public policy calls. We are

not going to solve all the world’s problems at once, so we have to

decide what is the most severe one facing us, and the most severe

one facing the elderly in this country, I believe, is the lack of coverage, not the crisis that may be in 2014 or 2030. That is my opinion.

Mr. GREENWOOD [presiding]. I think the gentleman’s time has

expired. The Chair recognizes himself for 5 minutes.

Ms. Washington, in his State of the Union address, the President

recognized a senior citizen in the gallery whose name was Pat

Brown and cited him as an example, and noted that he had an anVerDate 11-MAY-2000 13:23 Jul 12, 2000 Jkt 064041 PO 00000 Frm 00123 Fmt 6633 Sfmt 6602 E:\HEARINGS\62971 pfrm07 PsN: 62971
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nual prescription drug cost of $4,200 and he had no drug coverage.

Could you, in order to illustrate the President’s proposal, tell us

how her—excuse me—Mrs. Brown would be helped by the President’s proposal.

Ms. WASHINGTON. Yes, sir. The President’s proposal offers prescription drug coverage up to a limit each year, and the premium

for beneficiaries is subsidized by the government at 50 percent and

the beneficiary pays the other 50 percent. Drugs are covered up to

a limit of $2,000 in the first year and $5,000 when fully phased in.

And so, Mrs. Brown would receive assistance. She would pay the monthly premium, which in 2003 would be $26 a month. And then,

she would receive her drugs at a discount that would be offered by

the pharmacy benefit manager, or the HMO that she belongs to,

and she would pay up to a 50 percent co-pay for the cost of the

drugs that she receives each year.

Mr. GREENWOOD. Let me see if our math is the same here. According to my math, she would pay, in 2003 she would pay $3,500

out of her pocket under the Clinton plan, of the $4,200, because the

government’s contribution is capped at $1,000. She would be paying approximately $300 in premiums, plus one-half of the $2,000

maximum benefit, or $2,200, and therefore her uncovered drug

spending would be $3,500. Do we have different mathematicians

working for us here?

Ms. WASHINGTON. Well, I think there are two points. The first

point is that if she is uninsured now or she participates in a

Medigap plan, she is not realizing the benefits of the discounts that

the pharmacy benefit managers can give her. So, her costs would

hopefully be lower with drug coverage. I think when the benefit is

fully phased in at $5,000, she would receive more help than she

would in the first year.

Mr. GREENWOOD. If she lives that long, and we hope she does.

Mr. WAXMAN. Without a drug program, she might not.

Mr. GREENWOOD. Right, right. Well, without a good drug program she might not, that is the problem. And of course I think this

goes to one of the essential dilemmas here, is with finite resources

do we want to make sure that we cover more of her costs and focus

this on the lower end of the socioeconomic scale, or provide a relatively thin coverage, at least for the first several years, to everyone. That is a basic philosophical consideration for us.

You mentioned the fact that you hadn’t, I think it was in response to a question, that the President and the administration

hadn’t developed a benefits package, and that you intended to work

with the Congress, you hoped to work with Congress on that. In

fact, it is my understanding that, A, we have no legislative language from the White House at all with regard to the President’s

proposal; and, B, I am not aware, and I am one of the guys supposedly writing this legislation, I am not aware of any overtures

from the administration to work with the Congress.

And let me say to you that it is my fervent hope that what we

end up doing is having a package on the President’s desk that we

have negotiated with the administration, that we all can feel good

about, Republicans and Democrats, and get signed into law this

year. But to do that I think we are going to—time is obviously very

limited—we are going to have to see language from the administraVerDate 11-MAY-2000 13:23 Jul 12, 2000 Jkt 064041 PO 00000 Frm 00124 Fmt 6633 Sfmt 6602 E:\HEARINGS\62971 pfrm07 PsN: 62971
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tion, some very concrete and detailed language. We are really going

to have to establish a dialog here, where representatives of the administration and representatives of the Congress, both chambers,

both sides of the aisle, are working toward that common goal, because we won’t get it otherwise.

Could you comment on that?

Ms. WASHINGTON. Yes, sir. Back in July, we released a very detailed plan of the President’s proposal that was about 40 pages

long. We are working on legislative language now, and I can certainly get back to you about what the plans are for that. But we

would be happy to sit down and work with this committee, like we

have in the past, to discuss the issues and see what we can do.

Mr. GREENWOOD. Well, I will personally take you up on that because I believe that that is a dialog that has to begin sooner rather

than later, and I have been around here long enough to know that

when it happens later, it usually is too late and we end up with

a veto or we end up with stalemate and a lot of political fingerpointing, and I think we ought to avoid that.

I see no other members—oh, Dr. Ganske is recognized for 5 minutes.

Mr. GANSKE. I want to get back to the macro level here. I appreciate your testimony.

It looks to me like today Medicare expansion of benefits is even

more difficult than it was in 1988, 1989, and here is why. We have,

I think, a very firm bipartisan commitment to protect Social Security. That makes deficit spending for new programs very difficult.

Second, how do you expand coverage for some when others have

no coverage at all, i.e., the uninsured, the totally uninsured?

And, third, as Mr. Scanlon’s first chart points out, we are getting

closer and closer to Medicare insolvency, and so what should our

priorities be? Should our first priority be to protect the current program? Or should it be to expand the current program and then

push that insolvency date closer? Now, the President’s plan recommends spending roughly $170

billion over 10 years, I think, $168.5 billion or something like that.

Senator Breaux’s plan talks about $70 billion. Earlier today I

talked about how much this surplus really could be.

And now that I have got the CBO paper in front of me, you

know, if you look at the projections for spending just to keep up

with inflation, not counting emergency spending, then you get

about $830 billion in surplus over 10 years. So knock off about another $200 billion for emergency spending, and then knock off

about another $100 billion for a bipartisan commitment for increased spending on defense. I hear that all the time from both

sides of the aisle, from the President. So you could knock off about,

you know, another $300 billion just for that. So now you are down

to about $500 billion over 10 years.

Okay. What I am saying is this: I am terribly frustrated by this

process, because we don’t know, A, how much a real prescription

benefit is going to cost, because we don’t know what new drugs are

coming along, and the President’s plan is open-ended. You are talking about 50 percent of expenses but we don’t know what the expenses are. I mean, it could be a lot more than what we are projecting.

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And we don’t know, because we don’t have a budget at this point

in time, how much we are projecting for being able to cover, say,

the uninsured. If we did nothing more than make an effort to get

those who already qualify for Federal programs into the programs,

that is an additional significant cost, much less an expansion.

And so, you know, I guess I would like your comments on this.

How can we justify this, proposing these programs, without a context of a budget that we have agreed on in a bipartisan fashion?

Mr. Scanlon?

Mr. SCANLON. Dr. Ganske, I think in part we need to go and look

at that bigger picture again, and it is not just the issue of this financing picture but it is the issue of the operation of the Medicare

program. Because I think that in both the President’s proposal and

in the Breaux-Frist bill and in the work of the commission, we

were talking about not only modernizing this program in terms of

adding a drug benefit and stop-loss coverage but also trying to

make it more efficient, and hope that we would get savings there

that would both be able to cover the cost of some of these benefits

as well as to make it more sustainable for the future.

Now, there is a big ‘‘if’’ there. I don’t think that we have the experience or the analysis yet to feel comfortable that we are going

to be able to do this, but I would agree with everything that you

said in terms of the dilemma we have in the tradeoffs. There are

significant needs besides drug coverage for Medicare beneficiaries,

such as the needs of the uninsured, and what is done about those

while one is thinking about drug coverage is a major issue.

But I am afraid that what we can try to do is provide you the

information on the relative effects of different approaches to this,

but when it comes down to having to make a choice between the

two, I don’t have any advice on that.

Mr. GANSKE. Ms. Washington, let me just go back over these

three points that I made.

First, do you agree that there is a bipartisan commitment to protect Social Security that makes deficit spending for new programs

very difficulty?

Mr. GREENWOOD. Please be brief when you respond, since the

gentleman’s time has expired.

Ms. WASHINGTON. Dr. Ganske, I can’t really comment on the

overall budget structure of the administration.

Mr. GANSKE. The administration doesn’t want to see deficit

spending.

Ms. WASHINGTON. That is correct.

Mr. GANSKE. Okay. And the administration has a real commitment to providing coverage to those who don’t have any insurance,

right?

Ms. WASHINGTON. Right. That is correct. We have a proposal——

Mr. GANSKE. And the administration has a real commitment to

making sure that Medicare stays solvent?

Ms. WASHINGTON. Yes, sir.

Mr. GREENWOOD. The gentleman’s time has expired.

Mr. GANSKE. Mr. Chairman, I would ask for an additional

minute, unanimous consent.

Mr. GREENWOOD. A quick minute.

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Mr. GANSKE. Hey, there is only three of us. I am sorry. Mr. Burr

is down here.

Mr. Scanlon, we are talking about, you know, trying to do basically a number of things in our budget. We are talking about tax

cuts, we are talking about an expansion of coverage for the uninsured, we are talking about prescription drugs and expansion of

benefits in Medicare, and there are a number of other priorities.

Can you make a suggestion for me? How can we even begin to look

at what we should be fashioning for some type of drug benefit for

those who truly need it, without knowing how much money we

have to spend, how much money is available?

Mr. SCANLON. I think we can begin by trying to help you in

terms of understanding what the implications of different levels of

resources going into this would be, and how those resources, different levels of resources, could be targeted, and some of the potential consequences of that targeting. But beyond that I don’t know

how to guide you, because I do—I mean, I understand your dilemma completely, which is that the list of potential uses of both

existing revenues and future surpluses is quite long and clearly

will go well beyond the money that is available.

Mr. GANSKE. Thank you.

Thank you, Mr. Chairman.

Mr. GREENWOOD. The gentleman, Mr. Strickland, is recognized

for 5 minutes for inquiry.

Mr. STRICKLAND. Thank you. I would like to address this to Ms.

Washington.

You mentioned in your testimony that a Medicare benefit needs

to be universal to avoid adverse risk selection problems, and the

question I have is, what are the risk selection problems that could

occur in a drug benefit that is targeted only toward certain beneficiaries such as low income seniors?

Ms. WASHINGTON. Well, risk selection happens when you are targeting the benefit only to a certain group or you are making it

unaffordable for others to join the program. What happens is, when

you can’t share the risk among the maximum amount of beneficiaries possible, the cost keeps going up and the relatively healthy

people will find that it is not affordable to them, and that cycle spirals out of control, so at a certain point the benefit isn’t really sustainable because no one can afford it.

Mr. STRICKLAND. And that gets to the second part of my question, and that is the level of subsidy that would have to be available to make benefits affordable to low income folks. And looking

at the President’s plan, I guess the major concern that I have about

it is, is the benefit attractive enough to attract sufficient numbers

of voluntary participants to keep this adverse selection process

from occurring? And I assume the administration has considered

that, but it seems to me that the benefit package is minimal at

best, and there are seniors that would find it inadequate and consequently find it not all that appealing to voluntarily participate.

Is that a concern?

Ms. WASHINGTON. Well, what we tried to do in designing the benefit is to make it attractive enough so that most beneficiaries would

participate, and we set the subsidy level at 50 percent in order to

achieve that, but at the same time trying to make it affordable for

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the program. We have a series of protections for the lowest income

beneficiaries, so that people under 135 percent of poverty have

their premiums and cost-sharing covered, and then people between

135 and 150 percent of poverty receive assistance on a sliding

scale.

The addition of the stop-loss protection that we talked about earlier would really serve to make the benefit more attractive to those

people with the highest out-of-pocket costs, and that was a concern

that we had last year, that is the reason why we added that.

Mr. STRICKLAND. One of the groups that is opposed to the administration’s initiative has communicated with a number of my constituents, and one of the things they charge is that it will not be

voluntary. They don’t do that exactly. They are very careful in the

words they use and how they use those words, but they make reference to the fact that the administration has indicated that approximately 80 percent of Medicare beneficiaries will choose to participate, and they take that estimate as an indication that this program will not be voluntary.

Can you tell me where you came up or how you came up with

the estimate that approximately 80 percent of Medicare-eligible

folks would choose to participate?

Ms. WASHINGTON. When we were designing the benefit, we consulted with our actuaries about the size of the subsidy and the generosity of the benefit package, and what, in their opinion, would

cause the benefit to be attractive so that almost all beneficiaries

would participate. That is how we settled on the 50 percent subsidy.

Eighty percent of the beneficiaries are expected to participate because we have subsidies for employers to continue to offer their private coverage. So, we do think that, as a result of the subsidies,

employers would take the incentive and continue to offer their private retiree coverage for those people who have it.

Mr. STRICKLAND. So the 80 percent estimate is not based upon

any coercion on the part of this program, but it is based on the assumption—and I guess that assumption is arrived at through some

scientific methodology—that 80 percent would choose to participate

either because they have no coverage currently, or the coverage

they have is inadequate, or the coverage they have is becoming so

expensive they can’t keep it, or they are afraid their HMO will drop

coverage, as many HMOs are doing. Is that a fair assessment of

the estimate?

Ms. WASHINGTON. Yes, that is correct, sir.

Mr. STRICKLAND. Thank you.

No more questions, Mr. Chairman.

Mr. GREENWOOD. The gentleman, Mr. Burr, is recognized for 5

minutes for inquiry.

Mr. BURR. Thank you, Mr. Chairman. I apologize to the witnesses for this schedule today.

Ms. Washington, let me see if I just understood you correctly.

Based upon the President’s proposal in blueprint form, it is estimated that 80 percent of seniors would choose the drug option that

the President has proposed?

Ms. WASHINGTON. That is correct.

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Mr. BURR. Well, let me run you through a chart. Tell me if I am

wrong. Based upon the 2002 phase-in, the partial phase-in, at

$1,000 per beneficiary of drug spending, I see a value to the individual who participated of $197.60, and an out-of-pocket cost of

$802.40. Who was it that looked at that and said 80 percent of the

seniors would see value in that?

Ms. WASHINGTON. Well, there are a couple of reasons why we

would see value in the benefit. First of all, the figures you are citing are the first year, and the benefit would——

Mr. BURR. Well, let me cite 2008. At $1,000, it has a ‘‘value of

the President’s plan’’ benefit, a negative $134, and the out-of-pocket

cost, $1,034 for the beneficiary. It actually gets worse.

Ms. WASHINGTON. Well, if you look at the costs of drug coverage

for the average beneficiary and you project those forward to when

the benefit starts, we do predict that the average beneficiary, while

the benefit isn’t free and we do require a 50 percent subsidy and

50 percent premium and 50 percent co-pays, there would be value

to the beneficiary from the benefit, both in terms of coverage and

in terms of——

Mr. BURR. Now, you are subsidizing some income level for the

premium costs, correct, under this plan?

Ms. WASHINGTON. For low income beneficiaries?

Mr. BURR. Yes, ma’am.

Ms. WASHINGTON. Right.

Mr. BURR. At what percentage of poverty would you subsidize

their premium costs?

Ms. WASHINGTON. Beneficiaries under 135 percent of poverty

would see full coverage for premiums and co-pays, and beneficiaries

from 135 to 150 percent of poverty would see premium assistance

based on a sliding scale.

Mr. BURR. Now, of the individuals that were in that 135 and

below, you are paying 100 percent of their premium?

Ms. WASHINGTON. That is right.

Mr. BURR. Then are they on a 50-50 share for every drug they

buy then, or are you paying 100 percent of their drugs.

Ms. WASHINGTON. We would also pick up the co-pay for those

beneficiaries.

Mr. BURR. You would also pick up the 50 percent co-pay. Now,

above the 135, they are partially responsible for their premium, or

you are going to subsidize their premium?

Ms. WASHINGTON. They are partially responsible for it. We would

partially subsidize their premium.

Mr. BURR. And how about the co-pay, the 50 percent?

Ms. WASHINGTON. No, they would——

Mr. BURR. They would pick up the 50 percent?

Ms. WASHINGTON. For that population, I think they would pick

up the co-pay.

Mr. BURR. Okay, so now you have picked up $302, and they are

going to pay 50 cents of every dollar that they spend. Now, at what

point does the partial subsidy of the premium stop, what income,

what poverty level?

Ms. WASHINGTON. That is at 150 percent of poverty.

Mr. BURR. So at 150 percent, the individual is responsible for

their premium and their co-pay?

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Ms. WASHINGTON. Right.

Mr. BURR. Okay. Now, so these numbers would be accurate for somebody at 150 percent of poverty or above, where of $1,000

worth of drug spending, the actual value of the plan is a negative

$134. Let me remind you what 150 percent of poverty is. Mr. Waxman and I disagree. I have it at $11,727 on an annual basis. We

are going to tell those people, we are going to offer them a product,

that if they have $1,000 worth of drug costs in a year, they are

going to pay $1,100 bucks for, and somebody has computed 80 percent of the seniors are going to buy into this?

Ms. WASHINGTON. Well, you have to look at the quality of the

coverage that most beneficiaries have now. A third of the beneficiaries have no——

Mr. BURR. Clearly, under this scenario, they could pay for it and

they would come out better.

Mr. SCANLON. Mr. Burr, if I could add, I think that we need to

really think about this as an insurance plan, and the issue is that

if I knew with certainty that I was going to have $1,000 worth of

coverage, then maybe I wouldn’t buy this insurance plan. But if I

have a different situation, which is that the only way I can get into

this insurance plan which is subsidized at 50 percent is to opt for

coverage now, and to be able to maintain that coverage for the future, and it is always 50 percent subsidized, I may do that.

The example I think that we need to look to is Part B, where the

participation rate is well above 90 percent, and it is something

where you have to opt into Part B when you first become eligible

for Medicare.

Mr. BURR. Or you——

Mr. SCANLON. You don’t wait until you discover what your health

care costs are going to be.

Mr. BURR. Let me ask you, from a GAO perspective, if we were

to design a drug benefit that was open universally to all seniors,

and there was value at the high end, let’s say for a minute that

the cost of the low end and the cost of the high end were the same,

have you eliminated the adverse selection risk of the low end because you have got seniors to buy in on the high end?

Mr. SCANLON. I think you have eliminated some of the adverse

selection risk. I think the two biggest things that eliminate the adverse selection risk are the subsidy, which makes this of value to

more people, and the fact that if you only have limited open enrollment periods, that people are going to sign up not knowing what

the future is going to hold——

Mr. BURR. So more mandatory than voluntary, is what you——

Mr. SCANLON. Well, not mandatory. It is voluntary, but you are

not——

Mr. BURR. But creating a penalty is a form of a mandatory suggestion. Let me just ask you, because I know we are going to run

out——

Mr. GREENWOOD. The gentleman’s time has expired.

Mr. BURR. A last question, if I could. Could both of you just comment on your impression of the commission’s report, which was

premium support as it relates to Medicare, and in that they had

a drug benefit, but would you just comment on whether HCFA is

supportive and thinks that that model would work, and whether

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GAO has looked at it and whether they think that model would

work.

Ms. Washington?

Ms. WASHINGTON. When the commission reported out its plan,

the President expressed some serious concerns about the model. We

have proposed our own plan, that includes injecting competition

into the program and adding a prescription drug benefit, that we

think would provide the right incentives to choose lower cost plans

without increasing fee-for-service premiums for people who would

like to stay in that program.

Mr. BURR. But that is not the President’s drug plan here.

Ms. WASHINGTON. No. The President’s drug plan is included as

part of his comprehensive reform proposal.

Mr. BURR. This proposal that is on the table now.

Ms. WASHINGTON. The one we are talking about today.

Mr. BURR. Dr. Scanlon?

Mr. SCANLON. Mr. Burr, we are in the process of looking at both

the premium support model and the President’s plan, and the

Comptroller General, David Walker, is going to be testifying on the

24th about the analysis that we have done, so I would defer until

that date.

Mr. BURR. I will wait anxiously for that.

Mr. GREENWOOD. The gentleman’s time has expired.

We thank the panel for your forbearance and for your excellent

testimony.

We are going to call up the third panel, call up Ms. Lisa Alecxih,

vice president of The Lewin Group; Dr. Bruce Vladeck, senior vice

president of policy, Mount Sinai NYU Health; Mr. Don Moran,

president, The Moran Company; Ms. Carol McCall, executive vice

president, Managed Care and Clinical Informatics; and Dr. Don

Young, chief operating officer.

For the benefit of the next panel and the members and the audience, I understand that Dr. Vladeck has a time constraint. We

would ask, without objection, that Dr. Vladeck have the opportunity to provide his testimony, and then we will break for the vote

and come back for the testimony of the others.

STATEMENTS OF BRUCE C. VLADECK, DIRECTOR, INSTITUTE

FOR MEDICARE PRACTICE, MOUNT SINAI SCHOOL OF MEDICINE, AND SENIOR VICE PRESIDENT FOR POLICY, MOUNT

SINAI NYU HEALTH; LISA MARIE B. ALECXIH, VICE PRESIDENT, THE LEWIN GROUP; DONALD W. MORAN, PRESIDENT,

THE MORAN COMPANY; CAROL J. McCALL, EXECUTIVE VICE

PRESIDENT, MANAGED CARE, ALLSCRIPTS; AND DONALD

YOUNG, CHIEF OPERATING OFFICER AND MEDICAL DIRECTOR, HEALTH INSURANCE ASSOCIATION OF AMERICA

Mr. VLADECK. Thank you very much, Mr. Chairman. I said in my

written statement a number of very sincere things about my appreciation for the courtesy and kindness this committee always

showed me, and once again I am grateful for it. When I appeared

before you more regularly, I made a number of commitments to my

family about I would no longer be missing important events, and

that has created my schedule problem today, and I appreciate your

indulgence.

128

Consistent with that, I will summarize very, very briefly my testimony by making one general observation and then just five points

that I think are germane to some of the discussion today.

The general observation I would make is actually triggered in my

mind by a comment that is part of Mr. Scanlon’s written testimony,

to the effect that over the last 5 years the 5-year projections of the

Congressional Budget Office of GDP have been off by an average

of 2.5 percent. I think some of the rhetoric that we got used to 5

years ago about the long term prospects of Medicare and the Medicare Trust Fund is simply no longer accurate. We haven’t caught

up with what the economy has done in the last three or 4 years,

in the models used not only by CBO but by the administration estimators as well, and I think some of the talk about impending bankruptcy and so forth of the Trust Fund is simply no longer accurate.

That is probably a discussion for another day, however, and specific to a drug benefit, let me just make five points very quickly.

The first point, Mr. Greenwood, I believe the technical economic

term is ‘‘price discrimination against retail customers,’’ but your

point is general. It is not targeted at seniors. Nonetheless, if you

look at who pays what for prescription drugs in the United States,

then the half of seniors who today are paying retail prices for prescription drugs are not only paying more than their fellow Americans who participate in plans, but they are in effect subsidizing

more affluent people all over the world who are paying lower drug

prices with the same availability, in Western Europe, for example,

and that obviously has to be part of the solution to the drug issue

that emerges from this process.

Second, if you look at what has happened to Medicare+Choice

since the enactment of the Balanced Budget Act, I am increasingly

convinced that it would be of enormous benefit to the continued

growth of enrollment in captitated plans in the Medicare program

to have a universal benefit that was available to everyone in the

fee-for-service program. What we are finding, what the GAO and

HCFA have reported is that HMOs, both because they believe it is

necessary to managed care and because it is necessary to compete

in the market, continue to offer drug benefits even though they

have had to scale them back very dramatically, but that the cost

increases they have experienced because of pharmaceuticals have

had an adverse effect on their profitability and have contributed

significantly to their departure from the program over the last several years.

If you had the same benefit structure in both fee-for-service and

managed care, which was by the way not recommended by the nonreport of the Bipartisan Commission, then in fact the plans could

compete on efficiency and customer service and quality and not be

at risk for needing to attract beneficiaries by offering a benefit that

the plans themselves can no longer afford to provide.

Third, I know it is very popular in this city, I have been guilty

of it myself, to talk about the virtues of targeting from an analytic

point of view: Let’s get the money where it is most needed, let’s

just make a benefit available to those who most need it.

There has been a lot of discussion already today, I won’t repeat,

about problems of adverse selection in drug insurance plans, but I

would also suggest to you that we have a lot of experience with efVerDate 11-MAY-2000 13:23 Jul 12, 2000 Jkt 064041 PO 00000 Frm 00132 Fmt 6633 Sfmt 6602 E:\HEARINGS\62971 pfrm07 PsN: 62971
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forts to target benefits to subsets of the Medicare population or to

other folks, with which this committee is very familiar. As of today,

barely half of the folks who are eligible for the QMB and SLMB

program are enrolled in them.

The problem with targeting is that it is very difficult to make it

work, and it often fails to work. The difference in participating

rates between, say, the QMB and SLMB program, or in Medicaid

enrollment levels when it was tied automatically to an entitlement

for cash assistance, as opposed to say enrollment levels in the

CHIP program, suggests that you can expend a lot of money on administrative overhead and still reach only a fraction of the people

you are ostensibly targeting; and that it is very difficult in a

means-tested program to get to all the potential eligibles without

enormous, enormous expenditures.

So the problem with targeting is that it is great if you hit your

target, but we mostly don’t, and that is—we have a lot of experience in that regard, and it raises real questions, particularly with

a drug benefit.

I do think the analogy with Part B, though, is highly relevant on

the issue of folks who currently have coverage that might be superior to that as part of any plan that was adopted. As Part B now

exists, people have a one-time election when they first become eligible. If they have an employer-provided benefit, the election is postponed until the date at which they lose the employer-provided coverage. If they elect after the initial enrollment period, they can still

get the benefit, but they have to pay an actuarially determined

penalty that reflects their potential risk effect on the actuarial pool

from their delayed enrollment. It is a process that has been working very effectively for 30-some-odd years, and there is no reason

why it couldn’t be adopted again.

The last thing I will say is that we had a lot of experience, as

the chairman knows, on the Bipartisan Commission on the whole

issue of just what a defined benefit is, and the world in which

every employer and every PBM and every HMO has their own formulary and their own generic substitution policies and so forth. I

think none of us want to be in the position where Medicare offers

one set of benefits in one part of the country and another set of

benefits in another part of the country.

And, therefore, while I think it is very valuable to use the expertise of the private sector and private insurance plans in administering a drug benefit, I think important coverage issues which

have to do with whether someone can get the same benefit in San

Diego that they get in Maine can’t be left to a highly decentralized

process. I am not suggesting the executive branch should make

those decisions unilaterally. There are a lot of mechanisms to get

the wisdom and participation of the industry and the scientific

community and consumers. But the notion that you would permit

too much flexibility in just what the benefit meant from one part

of the country to another, I think would be very dangerous and politically very risky over time.

I see my red light is already on. I know you have been very indulgent already. I thank you for the opportunity.

[The prepared statement of Bruce C. Vladeck follows:]

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PREPARED STATEMENT OF BRUCE C. VLADECK, DIRECTOR, INSTITUTE FOR MEDICARE

PRACTICE, PROFESSOR OF HEALTH POLICY AND GERIATRICS, MOUNT SINAI SCHOOL

OF MEDICINE

Mr. Chairman, Mr. Dingell, Mr. Waxman, members of the Committee, it’s a great

personal as well as professional privilege to have the opportunity to appear before

you today. In the two and a half years since I left the government, there’s not very

much that I’ve missed, but I was always treated with great courtesy and interest

by members of this Committee of both parties, and so I’m pleased to have the opportunity to appear before you again. Professionally, it’s especially nice to be able to

discuss Medicare reform in an environment in which we can appropriately focus on

reforming the program by improving its benefit structure and its services to its

beneficiaries, rather than having to focus most of our energies on reducing expenditures. I must emphasize for the record, in addition, that I am appearing before you

today as a private citizen, and that the views I will be expressing are my own, and

not necessarily those of Mount Sinai NYU Health, the Mount Sinai School of Medicine, or any other organization.

The combined effects of the Balanced Budget Act of 1997, on which we worked

so hard together, improved program administration, and—perhaps most importantly—the continued performance of the nation’s economy at a level far above the

expectations of any of the official forecasters have dramatically altered Medicare’s

short and long-term financial prospects. At the moment, it appears that program expenditures are growing less rapidly than program revenues, and the projected date

of insolvency of the Hospital Insurance Trust Fund, which has already been extended fourteen years since the BBA was enacted, will undoubtedly be estimated

to occur still further in the future when this year’s Report of the Trustees is released. Moreover, the federal government’s budget surplus is so large that we now

have the opportunity to infuse literally tens of billions of dollars into the Trust

Funds, as a significant down payment on the resources we will need to provide benefits as us baby boomers reach eligibility age over the next thirty years. Still lagging

behind these changes, however, is the conventional wisdom about Medicare’s longrun prospects: the last several years should have made it clear that the doom and

gloom projections of the 1980s and early 1990s were grounded in shortsighted and

ultimately inaccurate conceptions of the prospects for the American economy. Medicare today is in better financial health than it has been in some time, so we must

concentrate on improving the health of its beneficiaries.

Whatever one’s view about the long-term economic prospects may be, it is clear

that, in the short run, the most important agenda for Medicare reform is the program’s archaic and inadequate benefit structure. I applaud this Committee for turning its attention to the most visible aspect of that inadequacy: the absence of coverage for outpatient prescription drugs within the basic Medicare benefit package.

I hope that your deliberations today will be part of a process that produces enactment of a comprehensive prescription drug benefit before this year is out. In my remarks, I would like to make a few general observations about the problems in affording prescription drugs for Medicare beneficiaries, then identify four components

that I think are essential in any new prescription benefit. I will conclude with some

general observations about containing program costs.

The Need for a Prescription Drug Benefit

I will not belabor what everyone already knows. Prescription drugs are an increasingly important part of modern medical practice, with recently-introduced

pharmaceuticals holding the prospect for significant improvements in health and reductions in mortality, especially for the elderly. In conjunction with the increased

importance of prescription drugs have come rapid increases in both their prices and

utilization. Increasing numbers of Medicare beneficiaries are experiencing difficulty

in affording the drugs their doctors prescribe for them; the response to affordability

problems of forgoing prescriptions, or taking less than recommended doses, is increasingly reported, as are instances in which elderly patients are hospitalized or

receive other, expensive treatments for problems caused by their inability to afford

prescriptions. As a proportion of total income, Medicare beneficiaries now spend almost as much on out-of-pocket prescription drugs as the average non-elderly family

spends on all out-of-pocket medical expenses. But I would like to emphasize three

aspects of this problem that generally receive somewhat less attention.

First, the way in which the prescription drug market has evolved means that

roughly 20 million Medicare beneficiaries (those without any prescription drug coverage, those with coverage through individual Medigap policies, and some of those

with employer-provided policies) are essentially the only large group of insured

Americans paying retail list prices for their prescriptions. As other purchasers, such

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as private insurers or hospital group purchasing organizations, seek ever-larger discounts from manufacturers or wholesalers, increased costs are passed on to that

part of the population most dependent on prescription drugs, and least able to afford

them. Given the price differentials in prescription drugs between the United States

and other industrialized countries, that means, in effect, that those 20 million Medicare beneficiaries are subsidizing prescription costs for younger and more affluent

people throughout the Western world. Any Medicare drug benefit that fails to remedy this unfairness will be inadequate and excessively expensive.

Second, prescription drug coverage offered on a voluntary basis is especially vulnerable to adverse risk selection. The results are apparent both in the market for

those Medigap plans that cover prescriptions and in the experience of state-financed

prescription plans for low-income Medicare beneficiaries. While all older people are

at risk for high prescription costs, a significant fraction of Medicare beneficiaries

with the greatest need for prescription drugs require expensive maintenance doses

for chronic conditions. As the prices of drugs and insurance both increase, insurance

premiums are thus a good buy for only a diminishing fraction of beneficiaries with

the highest costs, thus further driving up premiums in a classic insurance-selection

‘‘death spiral.’’

Third, and perhaps least obviously, I personally believe that guaranteed prescription drug benefits for all Medicare beneficiaries may be essential to the long-run

prospects of Medicare+Choice plans. Since the enactment of the Balanced Budget

Act, most managed care plans participating in Medicare have apparently concluded

that offering some kind of prescription benefit is essential both to their ability to

attract enrollees and to their ability to effectively manage their care. Yet simultaneously, increases in prescription drug costs are having a significantly adverse effect

on the profitability of plans, causing many of them to reduce or discontinue their

participation in Medicare. Inclusion of a prescription drug benefit in the basic Medicare benefit package would permit us to determine payment for fee-for-service and

Medicare+Choice on the same basis, move forward with more sophisticated risk adjustment, and make relative efficiency and customer satisfaction the basis for competition between plans and ‘‘traditional’’ Medicare. At the same time, in response

to the pressures of rapidly-rising drug costs, Medicare+Choice plans have adopted

a bewildering variety of formulary restrictions, benefit caps, and other techniques

to try to manage their pharmaceutical costs, most of which are perfectly reasonable

in themselves, but which significantly complicate the process of choice for beneficiaries. Adoption of a standard Medicare pharmaceutical benefit would significantly simplify the choice process.

Essential Components of a Medicare Prescription Benefit

• 1. UNIVERSALITY: First, any Medicare prescription drug benefit should be

universal—that is, it should, at a minimum, be available to all beneficiaries in conjunction with their initial Medicare enrollment, and for all current beneficiaries

when the new benefit first becomes available. There are at least three reasons for

this. The problem of adverse selection in any more limited drug-only insurance program has already been noted. The way to prevent or combat it is to combine universal availability of the benefit, enrollment procedures that are easy but available

only under specified conditions, and subsidy levels adequate to insure that the benefit is a good deal even for those beneficiaries who do not anticipate high drug utilization. Further, as members of this Committee well know, our experience with the

Qualified Medicare Beneficiary and Supplemental Low-Income Medicare Beneficiary

programs demonstrate that efforts to enroll Medicare beneficiaries on an ad hoc

basis for needed additional benefits are likely to be cumbersome and ineffective—

and likely to fail to reach a large fraction of those most in need. Policy wonks love

to expound on the virtues of ‘‘targeting’’ benefits to some subset of the population

with particular needs. That’s a fine idea in theory, but actual programs too often

misfire. And we always run the risk of spending as much money on administration

and outreach as we save by delimiting the pool of eligibles. Most fundamentally, the

universality of Medicare as a social insurance program is one of its greatest operational as well as political strengths. Beneficiaries know that they have contributed

to the program throughout their working lives, and continue to contribute in retirement. To deny an additional benefit to a contributor who fails by some slim margin

to meet some arbitrary cutoff or eligibility standard is neither fair nor practical.

I know that many participants in the policy process have expressed concern that

a universal Medicare drug benefit might actually prove to be an inferior or more

expensive alternative for many of the 30% or so of current beneficiaries who have

prescription drug coverage through an employment-related retirement benefit, and

I see no reason why beneficiaries shouldn’t be permitted to opt out of a new drug

benefit, just as they all have the option of declining Part B coverage. Indeed, it

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makes sense to extend the Part B analogy still further: beneficiaries should have

an initial election period to accept or decline prescription coverage; if they decline

because they are covered by an employment-related plan, they should be permitted

a new election period should that plan be discontinued; otherwise, delayed election

should result in an actuarially-increased premium.

• 2. ADEQUACY: It would be a tragedy for this or any other Congress to struggle

to enact a prescription drug benefit for Medicare beneficiaries that turned out to be

inadequate to beneficiaries’ needs. It’s essential that any prescription benefit be designed and administered in a fiscally prudent way, but it’s also essential that the

benefit be worthy of its name. That means that it must provide at least some assistance for the great majority of beneficiaries with prescription expenses of as little as

several hundred dollars a year—since such ‘‘little’’ amounts, if unexpected and

unbudgeted, can have large impacts for people scraping by on fixed incomes—while

providing more comprehensive protection against catastrophic expenses. In fact, for

Medicare beneficiaries the problem of affording prescription drugs is really three

problems in one. To borrow from medical terminology, there are beneficiaries with

sudden, acute drug expenses, beneficiaries with significant chronic expenses, and

beneficiaries confronted with total financial disaster as a result of prescription drug

expenses. A new drug benefit must address all three types of problems.

• 3. UNIFORMITY: One of the cardinal principles of Medicare is that it provides

the same benefits everywhere throughout this diverse and heterogeneous country.

One of the lessons many of us learned in the deliberations of the National Bipartisan Commission on the Future of Medicare is just how complex maintaining and

insuring a defined benefit can be. This problem is especially important in the context of a prescription drug benefit, since in response to cost pressures, insurers, employers, and health plans have developed an extraordinary array of techniques for

limiting formularies, encouraging or requiring certain substitution practices, or delaying coverage for newly-introduced products. But to permit too much variation or

decentralization in this kind of decision-making for a Medicare drug benefit would

create the very real risk of situations in which beneficiaries living in different parts

of the country with identical medical conditions and identical physician decisions

about optimal care would receive significantly different benefits. Medicare beneficiaries who need transplants are eligible for them under the same conditions and

limitations whether they’re in Seattle or Miami. They should be able to get the same

drugs, when prescribed by their doctors.

Precisely because administration of a drug benefit is complex and affected by rapidly changing scientific and market conditions, the Congress probably would not

want to legislate the details of a drug benefit with the degree of specificity necessary

for administration. Rules for generic substitution for brand-name drugs should probably vary from one drug category to another, for example, and vary over time as

well, as products enter and leave the market. It’s probably desirable, therefore, to

construct some kind of broadly-based of advisory structure or process to assist the

Congress and the Executive Branch in making such decisions. This would permit

an effective combination of broad-based participation by stakeholders in programmatic policy with efficient implementation of those policies. But there must be

such a process—open, participatory, and explicit—if beneficiaries in different parts

of the country are to be treated equitably.

• 4. ADMINISTRABILITY: Providing an adequate Medicare drug benefit in a fiscally prudent manner is a significant challenge in itself; it would be unwise to exacerbate that difficulty by imposing a separate, complex, administrative structure on

a single benefit. Given the economies of scale available from existing electronic billing and remittance technologies for pharmaceuticals, and the demonstrated quality

advantages of utilizing automated prospective utilization review software, it should

be possible to maintain the level of exceedingly low administrative costs that now

prevails for other Medicare fee-for-service benefits by building on existing privatesector capabilities for benefits administration. At the same time, however, it would

be wasteful and foolish to create new enrollment, premium collection, or beneficiary

communications processes when the current ones work so unobtrusively and so inexpensively.

Containing Costs of a Prescription Drug Benefit in Medicare

Even at this relatively prosperous juncture in the nation’s and Medicare’s economic history, it is obviously essential to take every possible step to ensure that a

Medicare prescription drug benefit is implemented as economically as possible. Prescription drugs are expensive; that’s why a drug benefit is needed in the first place,

and a new benefit will be expensive. But it’s critical that it not be any more expensive than is absolutely necessary.

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There are essentially three dimensions to a strategy of controlling the cost of a

prescription benefit. The first is to require some degree of beneficiary cost-sharing

for first-dollar expenditures, as all the legislative proposals now before the Congress

do. The second, as discussed above, is to employ the most effective available utilization management techniques on a uniform and equitable basis. But as I mentioned

at the outset of this statement, it is also necessary to recognize that the pricing of

prescription drugs for most Americans is already determined not by some reproducible, abstract, formula, but through a continuing process of multidimensional marketplace relationships. Some method must be found to arrive at prices in a Medicare

drug benefit that are equitable to taxpayers, beneficiaries, retailers, and manufacturers alike.

The most economical approach, from the perspective of taxpayers and beneficiaries, would be to simply let the federal government negotiate prices directly

with manufacturers, but I understand the uneasiness with which many analysts

and commentators, not to mention the pharmaceutical industry itself, views this option. There have thus emerged all sorts of proposals to delegate the price-negotiation

process to private intermediaries of one sort or another, through contracting with

pharmacy benefits management firms or other entities with experience in negotiation of pharmaceutical prices. To the extent that such negotiations are indeed on

pricing, within the context of nationally-uniform policies on coverage, substitution,

and formularies, if any, I suspect that’s a reasonable approach, although I would

be apprehensive about any sort of fixed-price arrangement that provided the intermediaries with too great a financial incentive to maximize profitability at the expense of beneficiary coverage or convenience.

To make such a system work, over time, would require the availability of cost,

price, and use data to both Congress and the Executive Branch that should be easy

for private firms already in the business to provide, but that is not now generally

available within the pharmaceutical industry. The old Progressive maxim that sunlight is the best disinfectant when the expenditure of public funds is involved should

apply here with particular relevance, and should be central to any administrative

arrangements the Congress adopts.

Conclusions

In summary, I would urge the Congress to move expeditiously to enact a prescription drug benefit for Medicare beneficiaries that is universal, adequate in coverage,

uniform throughout the United States, and simple to administer. Doing so will be

expensive, but there are ways to insure that costs are minimized aggressively, and

failing to act will make certain that thousands of this nation’s most vulnerable seniors are unable to obtain the medications they need to maintain or restore their

health—or forced to obtain them by foregoing other, essential expenditures. This

problem will only get worse over time. The sooner the Congress acts, the sooner all

Medicare beneficiaries will be relieved of the anxiety of being unable to afford medications they know can benefit them.

It has been, again, an honor and a privilege to have the opportunity to appear

before you today. I’d be happy to try to respond to any questions you might have.

Thank you very much.

Mr. GREENWOOD. Thank you, Dr. Vladeck. I must ask the indulgence of the rest of the panel, and they have been waiting all day.

We have just 5 minutes left in this vote. I am informed that there

will 10 minutes of debate followed by another vote, so we will be

at least 20 minutes and perhaps 25 minutes until we return.

Dr. Vladeck, we would love to ask you questions, but if your

schedule doesn’t permit that, we will understand.

Mr. WAXMAN. Mr. Chairman, may we leave the record open and

ask him some questions in writing?

Mr. VLADECK. If you have written questions and would like me

to respond to them, I will do so right away.

Mr. GREENWOOD. Certainly. Without objection. So this hearing

will recess until 2:20.

[Brief recess.]

Mr. BILIRAKIS. Okay. I think we all have been introduced, have

we not? Ms. Alecxih, is that correct?

Ms. ALECXIH. That is right.

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Mr. BILIRAKIS. Vice President of The Lewin Group. Please proceed. Your opening statement, your written statements, of course,

are made a part of the record.

STATEMENT OF LISA MARIE B. ALECXIH

Ms. ALECXIH. Basically, I was asked to discuss issues of fact, primarily in terms of coverage, prescription drug coverage among

Medicare beneficiaries, and I guess the key points to be made are

that nearly 70 percent of Medicare beneficiaries have some prescription drug coverage. It was mentioned earlier that there is

some portion of those that don’t have the entire period of the year,

but a fairly large proportion, most of those with coverage obtained

it from employer-sponsored plans, and nearly equal percentages get

it from Medicaid, Medicare HMOs, Medigap, and some similar percentage switch what their source of coverage is during the year.

Those with Medicare HMO coverage and employer-sponsored coverage are most likely to have prescription drug coverage. I said

groups of those with Medicare HMO coverage, about 94 percent of

them have prescription drug coverage, and those with employersponsored coverage, about 89 percent of those have it. And those

with Medigap are least likely to have coverage, about 42 percent.

These are all data based on the Medicare Beneficiary Search or

Survey, which is a nationally representative survey of Medicare

beneficiaries. That 42 percent for Medigap enrollees is probably

high. Country-wide, the National Association of Insurance Commissioners data, where it does report policyholders by the type of policy, say standardized Medigap plans, and that is only 15 to 20 percent of those have by that measure an H,I, or a J plan for prescription drugs they chose. So it is not clear whether Medicare is accurate or not.

The level of prescription drug benefits that is provided by these

different sources of coverage varies. Medicaid and employer-sponsored tend to have the most generous benefits with low co-pays,

and on the employer-sponsored side there are low deductibles, either an out-of-pocket limit or a lifetime limit, where Medigap has

a fairly high co-pay requirement with a $250 deductible in their copay and plan limits of $1.250 or $3,000.

Each of them limit access to that coverage in some way. Employer-sponsored, obviously you have to have worked for an employer that offers this retiree coverage. That is generally larger employers. Medicaid, you have to be low income; Medigap, beyond the

6-month enrollment period when you become Part B eligible, there

are almost always health status questions that you have to pass in

order to be able to gain that coverage. And Medicare HMO, you are

trading off freedom of choice among providers, and there is some

geographic variation in the types and the level of benefit that is offered.

Among the 31 percent of Medicare beneficiaries without prescription drug coverage, if you look at the sheer numbers, most of them

are younger and have higher incomes. But if you look at the proportion within a group, the oldest old are least likely to have prescription drug coverage, and those actually in the middle and moderate income groups are the least likely to have prescription drug

coverage.

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And if you look at the trend in prescription drug coverage over

the 1992 to 1996 period, it has increased pretty dramatically based

on the MCBS data. It has gone from 54 percent to 69 percent, but

it is unclear whether or not this will continue into the future or actually decline, because of payment changes to Medicare HMOs and

whether or not those plans will be able to continue to offer drug

benefits. We do know that they have limited the level of drug benefits between 1999 and 2000, but not really in terms of the percent

of plans offering benefits. It is about the same. And also the role

of employer-sponsored coverage in the future, particularly for future retirees. Current retirees look pretty safe. It is the ones who

in a decade it is not clear what that source will—what role that

will play among the Medicare beneficiaries.

[The prepared statement of Lisa Marie B. Alecxih follows:]

PREPARED STATEMENT OF LISA MARIA B. ALECXIH, VICE PRESIDENT, THE LEWIN

GROUP

I am going to discuss what we currently know about coverage and spending for

outpatient prescription drugs among Medicare beneficiaries. Most of the data presented are from the 1996 Medicare Current Beneficiary Survey (MCBS). This survey

provides the most comprehensive information about the characteristics and health

care use and spending among a representative sample of Medicare beneficiaries. In

addition to the MCBS: some of the Medicare HMO data were obtained from the

HCFA-sponsored medicare.gov website which includes Medicare Compare, a database of relevant benefit coverage and levels for each Medicare HMO; some of the

employer-sponsored health plan data were obtained from the 1997 Bureau of Labor

Statistics (BLS) Employee Benefits Survey for Medium and Large Establishments

found at bls.gov; and some of the private, individually purchased Medicare Supplemental insurance information (Medigap) were based on tabulations of National Association for Insurance Commissioners (NAIC) experience reporting forms for 1998.

Exhibit 1 shows that approximately 69 percent of the 37.3 million Medicare beneficiaries in 1996 had prescription drug coverage at some point during the year.

Because Medicare generally does not cover outpatient prescription drugs, Medicare beneficiaries that most of those with coverage obtain it from a former employer.

Medigap, Medicaid and Medicare HMOs accounted for between 12 and 15 percent

each of those with prescription who did have coverage obtained it from a variety

of private and public sources. Exhibit 2 indicates drug coverage. Individuals who

changed their primary supplemental insurance choice at some point during the year

(switched sources) also constituted 12 percent of those with prescription drug coverage. A small percentage (two percent) reported relying on other public sources,

such as the Veterans Administration and state-sponsored programs.

Within supplemental insurance group, those enrolled in Medicare HMOs had the

highest percentage with prescription drug coverage, followed by employer-sponsored

(see Exhibit 3). Not all individuals with Medicaid coverage had drug coverage because many receive assistance with Medicare Part B premiums and copayments

through the Medicaid Buy-In programs (QMB, SLMB and QI), but do not qualify

for the full range of benefits offered by a state. Those purchasing Medigap coverage

were the least likely to have prescription drug coverage. The estimate of the percent

of Medigap purchasers with prescription drug coverage may be overstated. Data

from the National Association of Insurance Commissioners indicate that between 15

and 20 percent of those with Medigap standardized plans purchase those with drug

coverage (H, I, and J).

The level of prescription drug benefits varies among the sources of coverage:

• Employer—Slightly over one-half of employer-sponsored plans in medium and

large establishments have their prescription drug benefits subject to the major

medical limits of the plan. According to BLS data, in 1997, the average deductible was $268, the average annual out-of-pocket expense limit was $1,578, and

the average lifetime maximum was $1.1 million. Among plans that had specific

copayments for prescription drugs, these were generally $10 or less.

• Medigap—Among the ten standardized plans, H, I and J offer prescription drug

coverage with a $250 deductible, 50 percent coinsurance, and plan limits of

$1,250 or $3,000.

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• Medicare HMO (Medicare+Choice)—Most Medicare+Choice plans have plan limits

of $2,000 or less and copayments that vary for generic and brand drugs, but

are generally $10 to $25. Although most plans have limits, more beneficiaries

actually enroll in plans with no limits or more generous limits than $2,000.

• Medicaid—Medicare beneficiaries who qualify for full Medicaid benefits generally

have unlimited coverage for prescription drugs. Some states use formularies,

while others require nominal copayments.

Each of the primary existing sources of prescription drug coverage limit access to

coverage, either through employment requirements, underwriting or eligibility criteria.

• Employer—Individuals must have worked for a generally large employer that provides retiree coverage in order to have access to this coverage source.

• Medigap—After the six month initial open enrollment period for Part B, insurers

check health status prior to issuing policies (underwrite), which means those

most in need of prescription drug coverage would not be able to obtain it. In

addition, the premiums for these policies can be expensive.

• Medicare HMO—Individuals choosing to enroll in Medicare HMOs trade-off choice

of providers for extra benefits. Also, due to Medicare payment policies, there

availability of prescription drug coverage without an extra premium and level

of benefits vary geographically.

• Medicaid—This program is restricted to low income beneficiaries.

Among those without prescription drug coverage, these individuals tend to be

younger and have higher income (see Exhibit 4 and 5). The younger elderly constitute a large percentage because they make up the largest group of Medicare beneficiaries. However, the oldest old actually have a higher rate of individuals without

prescription drug coverage (see Exhibit 6). The same is true among the income

groups, where more individual without coverage have higher income levels, but the

rate of those without coverage is highest among those with lower incomes.

Medicare beneficiaries who do not have prescription drug coverage spend less on

average for their total prescription drug bill, but pay more out-of-pocket (see Exhibit

7). These individuals spend less primarily because they lack coverage.

Between 1992 and 1996, the percentage of Medicare beneficiaries with prescription drug coverage increased from 54 percent to 69 percent (see Exhibit 8). Much

of the increase was the result of increased enrollment in Medicare HMOs. Part of

the increase appears to be due to increasing rates of coverage within the primary

sources of coverage, which may be the result of individuals seeking out coverage in

response to rising prescription drug costs.

In the future, coverage rates may be less likely to increase because: 1) Medicare

HMOs may need to respond to further payment restrictions that may limit their

ability to offer zero premium drug coverage and limit their appeal to beneficiaries;

and 2) employers are cutting back on health benefits for future retirees.

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Mr. BILIRAKIS. Let’s see. Mr. Moran? I skipped over to you. I

have you all listed in my notes in a different order.

STATEMENT OF DONALD W. MORAN

Mr. MORAN. Thank you, Mr. Chairman. It is a pleasure to have

an opportunity to appear before you all today. Mr. Ganske, a pleasure, as well.

My assignment today, as I understand it, is to concentrate on

some of the technical design issues involved in building a Medicare

drug benefit, with a particular attempt to address the question of

whether or not it is technically feasible and affordable to put stoploss coverage in as part of the package. And so I just wanted to

briefly set the stage for that, summarize 5 or 6 points that I think

we have learned about that in looking at it in some depth over the

last year or so, and then be available with the rest of the panel to

answer whatever questions you have.

The stop-loss issue arises because of the intersection between two

forces that you have had ably described before you this morning.

On the one hand there is a growing concern about the cost of prescription drug benefits, which means that even those who have

them are beginning to see an increasing application of coverage

limits placed on those policies.

At the same time we have also seen, I think less fully discussed

this morning, some sharp uptake which soon become a tidal wave

of very high cost new therapeutic products coming onto the market.

In the past we have considered a high drug cost to be products that

had an annual cost in the range of $1,000 or $2,000. We are about

to enter an era where $5,000, $10,000, $15,000 and $20,000 products that offer major new therapeutic advantages at a substantial

price tag will be rolling into the system, and one of the things that

you engage in the stop-loss debate is the extent to which even people of middle and upper incomes will have the coverage adequate

to cover those kind of expenditures.

So it is in that context, Mr. Chairman, that there has been natural concern from a number of quarters. As a result, in our work

over the last year and a half we have made a concentrated effort

to look into the technical design issues, and I think we can summarize very succinctly what we think the major issues are.

First, the cost of putting stop-loss into a benefit package ranges

from pennies a day to large quantities of money, depending on exactly where you set it. I think it is fair to say that if you were to

concentrate a stop-loss benefit focused on the very highest cost

drugs and the upper end of the distribution, it might be surprisingly affordable, and that in fact the total number of Medicare

beneficiaries who today probably have expenditures in excess of

$5,000 or $10,000, say, would add up to a de minimis pile of money

from the perspective of the Trust Funds as a whole.

Conversely, if you bring that down well into the—distribution of

actual drug expenditures say down to the level of $1,000, then obviously a stop-loss benefit gets very expensive quite quickly and gets

progressively more expensive over time. So part of the art of this

is understanding what your policy objective is, which target population you really want to go after, and then fashioning a benefit

that does that.

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Second, I think it is important to say that the cost of a stop-loss

benefit is highly sensitive to the quality of the front end coverage

that people have. By front end coverage I mean the basic coverage

that people have for after dollar deductible and whatever co-payments to cover the first $1,000 or $2,000 of pharmaceutical expenditures. It is fair to say that the better that coverage is, the less

quickly people will reach whatever stop-loss limit is in application,

and the less they will be spending in excess of that. So the more

you marry stop-loss coverage with high quality front end coverage,

the more affordable it is likely to be.

A third point which I think is a corollary of that, Mr. Chairman,

is that you have to be very careful in your evaluation of proposals

that call for just catastrophic-only types of benefits. The reason is,

depending on where you might set the stop-loss limit on such a

benefit, that such a benefit would have the potential to induce people to drop their existing coverage in favor of that limit. And so you

have to be very careful to make sure that either you marry a stoploss provision to a front end coverage package, or else place the catastrophic threshold high enough so it is not an inducement for people to drop.

Fourth, and I think this is echoed in a couple of the things a variety of people said throughout the day today, integrating administration of a stop-loss benefit with whatever the front end benefit

is is very important. To have a situation where beneficiaries would

have to be saving up receipts in shoeboxes on one hand, to trundle

across town to plunk down to prove eligibility for another benefit,

strikes most people in the industry as sort of antediluvian at this

point. What you really want is integrated benefits administration

from front to back, with stop-loss coverage provided by whoever the

front end insurer is.

Fifth, and this has been referenced a number of times by folks

during the course of the day today, is that in a voluntary market

obviously the character of participation is going to matter in terms

of whether not you have significant selection effects, though I

would say that, again, if you were targeting a stop-loss benefit

higher up into the cost distribution, you would have much less of

a selection problem.

Finally, seeing my red light and being ready to summarize, I

think I will hit my sixth point, just to say that I think the one

thing we all understand about a drug benefit that would focus the

benefit on a high cost case or the highest cost cases, it will subject

whatever drug expenditures make up that pot of money to substantial scrutiny, and it is going to be very important to understanding

that if you go in the direction of a stop-loss benefit, to have a policy

that satisfies your policy objectives, to make sure that you can fit

that in some way that all parties will consider to be meaningful

and real.

Thank you very much.

[The prepared statement of Donald W. Moran follows:]

PREPARED STATEMENT OF DONALD W. MORAN, PRESIDENT, THE MORAN COMPANY

Mr. Chairman: I am Donald W. Moran, President of The Moran Company, a

multi-disciplinary health care research and consulting firm based in Fairfax, Virginia. While my firm provides services to businesses and associations with an interest in the matters that are the subject of your hearings, my purpose in appearing

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before the Subcommittee today is not to advocate any particular position on the

question of whether and how a prescription drug benefit might be added to the

Medicare program. Rather, I have been requested to address some of the important

program design questions with which this Subcommittee must wrestle in order to

arrive at a workable design. I will focus particularly on the issue of whether socalled ‘‘stop loss’’ coverage represents a feasible and affordable option in any drug

benefit design the Subcommittee might consider.

The issue of stop loss coverage arises in this debate because of the increasingly

high cost of many important pharmaceutical and biologic therapies that are now

emerging as a result of rapid innovation in the industry. While these products represent important improvements to the health care system’s ability to treat—and

even cure—disease, the intensive research and development costs of producing them

means that they come to market at substantial price tags.

It is important to understand that the cost to patients is not simply the result

of the high unit prices some of these products bear. Since the benefit of many of

these products flows from their ability to help physician and their patients manage

chronic disease over a sustained period of time, an equally important determinant

of the cost to patients is the cumulative cost of maintaining patients on these therapies. Annual maintenance costs in the thousands of dollars—or even tens of thousands of dollars—are becoming increasingly common. This trend raises natural

questions about Medicare beneficiaries’ ability to access these drugs at an affordable

cost.

As pharmaceutical therapy becomes an increasingly important part of the health

care system, we can expect a continued rise in the cost of providing benefits for prescription drugs relative to the cost of other health benefits. Although we can expect

offsetting benefits from this shift in therapeutic emphasis down the road, the immediate impact is a sharp rise in the trend rate of growth for pharmaceutical expenditures under health benefits programs that cover drugs. Companies that provide

drug benefits to both the working aged population and the elderly are responding

to this rising trend in various. One increasingly common response, which this Subcommittee has undoubtedly observed in its oversight of the Medicare + Choice program, is a growing trend toward annual benefit limits on coverage for prescription

drugs.

Annual benefits limit, viewed from the vantage point of the health benefits market, have some desirable features. Since the great majority of health plan beneficiaries have annual expenditures less than the limits, imposing these caps allows

insurers to provide essentially full benefits to the great majority of beneficiaries, at

a price far lower than would be possible if the cost of the small number of highest

cost users were included. The imposition of caps also partially isolates the insurance

pool from the upward trend in drug costs. Imposing caps, however, has the unfortunate side effect of exposing a limited number of the highest prescription drug users

to the full cost of the medications they need.

Given these realities, the question arises whether a Medicare prescription benefit

should provide ‘‘stop loss’’ protection for beneficiaries. As the term is commonly

used, ‘‘stop loss’’ refers to a benefit design under which the beneficiary’s out-of-pocket exposure for covered benefits is capped at a pre-specified level, after which the

benefits program provides full benefits with no further coinsurance. This benefit design is, of course, the mirror image of an annual benefit limitation.

Because of the skewed character of the distribution of drug benefits risk, the cost

of providing such a benefit is acutely sensitive to where the ‘‘stop loss limit’’ is set

relative to that underlying distribution—both initially, and over time. Using the

most recent Medicare Current Beneficiary Survey data available from HCFA—

which is our only comprehensive source of information about drug spending and coverage among Medicare beneficiaries—my colleagues and I have conducted a detailed

exploration of the fiscal and design implications of providing stop loss coverage for

Medicare beneficiaries under various proposals now pending before the Congress.

While we would be pleased to share our detailed findings on various points with the

Committee at some later time, let me summarize the key lessons we have learned

from this analysis:

First, the cost of providing stop loss coverage directed at the highest-cost patients

is surprisingly affordable. A policy directed at covering the limited number of Medicare beneficiaries whose annual spending on drugs exceeds, say, $10,000, would

amount to less than $50 million today, nationwide. As we come down the consumption scale toward lower levels, however, the costs begin to add up. By the time we

get down to the level of, say, $1,000, the current cost of providing stop loss coverage

could rise to over $10 billion annually.

Second, the cost of stop loss coverage is highly sensitive to the quality of the

‘‘front end’’ coverage Medicare beneficiaries have. By ‘‘front end’’ coverage, I mean

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their present private drug coverage, through either a retiree benefits program or

Medigap. This conclusion is a logical one, since the better that front end coverage

is, the longer it takes for a beneficiary to exceed whatever out-of-pocket spending

cap is provided by the stop loss coverage—and the less spending there is to cover

once they reach it.

Third, for the reason just cited, the Subcommittee should be careful in its evaluation of proposals for ‘‘catastrophic only’’ drug benefits proposals. While benefits

plans structured in this way may seem attractive for other policy reasons, they may

have the effect of encouraging beneficiaries to drop their existing private coverage,

converting the stop loss benefit into a high deductible unlimited coverage policy that

would start paying benefits much faster than it would if their private coverage had

been maintained.

Fourth, there are some important advantages to integrating administration of a

‘‘stop loss’’ benefit with whatever ‘‘front end’’ coverage beneficiaries elect. Unitary

administration would sharply reduce the administrative hassle of keeping track of

spending by the beneficiary, and would ensure continuity of application of whatever

benefits management techniques were employed by the primary insurer.

Fifth, the cost of a stop loss benefit to the beneficiary in a voluntary market for

private coverage will depend on the extent of participation, since a voluntary market

may experience some degree of adverse selection. If low users were to disproportionately opt out of the system, the per beneficiary cost of providing stop loss would rise.

It may be useful to note in passing, however, that the total cost of providing stop

loss coverage through a private voluntary market would not be increased by adverse

selection.

Sixth, and finally, it is important to point out that a stop loss benefit, by its very

nature, will invite scrutiny of the cost of the high end pharmaceutical products that

would comprise the bulk of the spending under such a benefit program. Those concerned, as I am, about the motive toward price controls embedded in any Government-financed drug benefit program will want to evaluate this issue carefully. It

would, I believe, be very important to craft a program with a regulatory and financing structure that insulated decision-making about product coverage and pricing

from political control.

Mr. Chairman, thank you for the opportunity to appear before the Subcommittee

this morning to share the results of our work in this area. I would welcome the opportunity to answer whatever questions you or your members may have.

Mr. BILIRAKIS. Thank you, sir.

Ms. McCall?

STATEMENT OF CAROL J. McCALL

Ms. MCCALL. Good afternoon. I would like to thank the chairman

and the other remaining members of the subcommittee for bearing

with us. I am very thankful for the opportunity to be here.

My name is Carol McCall, and I am very recently the new executive vice president of managed care for Allscripts, but prior to this

role, which again is very recent, as recently as last Friday I was

vice president of pharmacy management for Humana, which is a

managed care organization that provides pharmacy coverage for

approximately 450,000 seniors through a Medicare+Choice program.

I am a fellow of the Society of Actuaries and a member of the

American Academy of Actuaries, and I also serve as a member of

the Academy’s Medicare Reform Task Force that is studying a

number of issues involving proposed changes to Medicare. Among

these changes under study by the Academy are the issues associated with adding a prescription drug benefit to the current Medicare coverage. I would like to note that although I am a member

of the American Academy of Actuaries’ Medicare Reform Task

Force, I am testifying today in my private capacity and not on behalf of the Academy, whose analysis will discuss these issues in

more depth.

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I would like to outline some of the issues that should be considered when designing a prescription drug benefit provided through

insurance mechanisms. However, I would like to first emphasize

one very important factor, which is that prescription drug coverage

should not be added to Medicare in the absence of overall reform

to the financing structure of the Medicare program.

As you are aware, the trustees of the Medicare Trust Funds have

indicated that expenditures from the HI Trust Fund, Medicare Part

A, are expected to equal income into the fund as early as 2006, and

costs are projected to exceed income after that point. In fact, if income earned from interest on the assets in the Trust Fund is excluded, the fund currently pays out more in claims than it receives

from payroll taxes and premiums paid by beneficiaries.

The Medicare Part B fund, which is financed primarily by general tax revenues, faces increasing financial pressure due to rising

health care costs and a growing population of beneficiaries over the

next decade. So adding a prescription drug benefit to either of

these programs right now will only exacerbate the financial problems confronting Medicare, without the consideration of more broad

reform.

Specifically to the drug benefit itself, there are certain considerations that should be kept in mind when designing a prescription

drug benefit, and there are two broad categories that I am going

to touch on briefly and then we can, if there are any questions, we

can talk about those: First, the category of benefit design in particular; and then, second, overall program design and issues.

First, with respect to benefit design, is what drugs will be covered, and is it intended that all drugs will be covered by a plan or

only those prescriptions most utilized by seniors? Will so-called lifestyle drugs be covered? And who will determine which prescriptions are included or excluded from coverage? To what extent will

experimental treatments be provided? Each of these issues can

have a major impact on the cost of the benefit.

And second is how will the benefit be managed? Most plans offering a drug benefit use some sort of utilization and cost containment

mechanisms, and these mechanisms are designed to make sure the

drugs prescribed are appropriate for the particular medical condition of the patient. One consideration in providing a drug benefit

through Medicare is the extent to which utilization management

will be allowed both in the Medicare fee-for-service and in

Medicare+Choice health plans on an ongoing basis.

Third, the question of how will beneficiary cost-sharing be structured. A very important part of a health benefit design is how

much and the manner in which participants are asked to pay a

portion of out-of-pocket costs. If seniors pay for a portion of the

cost, they are more likely to compare competing drug therapies, including any generic prescription drug options that are available. In

addition, designing benefits where costs are shared, say through coinsurance, can impact the pricing strategies of pharmaceutical companies to the advantage of seniors.

Fourth in benefit design is to consider what extent drug

formularies will be permitted. Formularies are one mechanism that

PBMs, insurance companies and managed care plans use to contain

the cost of prescription drugs. There are a number of different ways

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in which formularies can be used, but all of them involve creating

a list of preferred medicines whose costs are less than their therapeutic equivalents. The question is, will this mechanism for containing cost be allowed? And, if so, what is the method for choosing

which drugs are going to be on a formulary? And can different

plans have different formularies?

For overall program design, it is important to consider to what

extent will private health plans be involved in the program. As we

have just heard, currently prescription drug coverage is available

for seniors through employers who offer retiree coverage, to those

who enroll in one of the Medicare supplement plans offering such

benefits, and for those members of a Medicare+Choice health plan

that provides drug benefits. You will need to consider the impact

of the Medicare drug benefit on these programs.

For example, will Medicare+Choice health plans be required to

offer a benefit, for it is now an option. If a drug benefit is offered

through Medicare, how will the Medicare supplement insurance

plans currently providing drug benefits be treated? Will pharmacy

benefit management companies, or PBMs, be used by Medicare to

help administer a drug benefit for the beneficiaries? And what

would be the role of PBM companies in this process? Would they

serve only as administrators, or would they take some of the risk

for their role they play in containing costs?

It is important that we understand these dynamics and the answers to these questions, as it will impact overall program cost and

quality.

Finally, in closing, I would like to return to something I said at

the start, which is, if Medicare is the vehicle chosen to provide prescription drug coverage for seniors, then Congress must act on the

overall financial issues facing the Medicare program. It may be

necessary to cut benefits, raise premiums, or increase contributions

from the Federal budget in order to maintain the solvency of the

Medicare Trust Funds. Adding an additional and potentially costly

benefit to Medicare will place a further strain on the Medicare program. Congress should not let this opportunity pass without a serious discussion on how to deal with the long range financial solvency of Medicare.

Thank you.

[The prepared statement of Carol J. McCall follows:]

PREPARED STATEMENT OF CAROL J. MCCALL, EXECUTIVE VICE PRESIDENT, MANAGED

CARE, ALLSCRIPTS

Good morning Chairman Bilirakis and members of the Subcommittee. My name

is Carol McCall and I am the Executive Vice President, Managed Care for

Allscripts. Prior to this role, I served as Vice President, Pharmacy Management for

Humana, Inc., a managed care organization that provides pharmacy coverage for approximately 450,000 seniors through the Medicare+Choice program. I am a fellow

of the Society of Actuaries and a member of the American Academy of Actuaries.

I also serve as a member of the Academy’s Medicare Reform Task Force that is

studying a number of issues involving proposed changes to Medicare. Among these

changes under study is adding a prescription drug benefit to the current Medicare

coverage. I appreciate the opportunity to appear before you today to testify regarding ways to provide seniors with coverage for prescription drugs. I would like to note

that although I am a member of the American Academy of Actuaries’ Medicare Reform Task Force, I am testifying today in my private capacity and not on behalf of

the Academy.

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Prescription drug costs represent a significant part of health care expenses, and

those costs have been rapidly rising over the past few years. The cost of prescription

drugs can have a major impact on seniors, many of whom are on fixed incomes.

Since Medicare is the primary source of health insurance coverage for seniors (almost 98 percent of the population in this country age 65 years or older is covered

by Medicare), one possible approach to this issue is to expand the current Medicare

coverage to include some level of payment for prescription drugs.

I would like to outline some of the issues that should be considered when designing a prescription drug benefit provided through an insurance mechanism. However,

I would first like to emphasize one very important factor—prescription drug coverage should not be added to Medicare in the absence of overall reform to the financing structure of the Medicare program. As you are aware, the Trustees of the Medicare trust funds have indicated that expenditures from the Federal Hospital Insurance (HI) Trust Fund (Medicare Part A) are expected to equal income into the fund

as early as 2006, and costs are projected to exceed income after that point. In fact,

if income earned from interest on the assets in the HI trust fund is excluded, the

fund currently pays out more in claims that it receives from payroll taxes and premiums paid by beneficiaries. The Supplementary Medical Insurance Trust Fund

(Medicare Part B), which is financed primarily by general tax revenues, faces increasing financial pressure due to rising health care costs and a growing population

of beneficiaries over the next decade. Adding a prescription drug benefit to either

of these programs will only exacerbate the financial problems confronting Medicare.

There are a number of health insurance plans today that provide prescription

drug coverage for their members. There are practical considerations that should be

kept in mind when designing a prescription drug benefit:

• Is providing a prescription drug benefit through Medicare the best option?—Many

of the current proposals start with the assumption that the drug benefit will

be delivered to seniors through Medicare. Is this the most cost-effective way to

help seniors meet their medical needs? Do other options exist—such as tax credits or using private insurance—that would work?

• How will a Medicare prescription drug benefit impact other existing programs?—

It is also important to evaluate the impact of a Medicare prescription drug benefit on other payers for medical care for seniors. Currently, three Medicare Supplement insurance plans pay for drug coverage. In addition, some employers

offer retiree health benefits that include prescription drug coverage and there

are a limited number of Medicare+Choice health plans with a prescription drug

benefit. You need to consider how a Medicare drug benefit will impact those

programs.

• What drugs will be covered?—Is it intended that all drugs will be covered by the

plan or only those prescriptions most utilized by seniors? Will so-called ‘‘life

style’’ drugs be covered, and who gets to determine which prescriptions are included or excluded from coverage? To what extent will experimental treatments

be provided? Each of these issues can have a major impact on the cost of the

benefit.

• How will the benefit be managed? Most plans offering a drug benefit try to impose

some form of utilization controls. These utilization management strategies are

designed to make sure the drugs prescribed are appropriate for the particular

medical condition of the patient. One consideration in providing a drug benefit

through Medicare is the extent to which utilization management will be allowed

both in the Medicare fee-for-service (FFS) program and in Medicare+Choice

health plans.

• To what extent will private health plans be involved in the program?—Currently,

prescription drug coverage is available for seniors who enroll in one of the Medicare Supplement plans offering such benefits and for those members of a

Medicare+Choice health plan that provides drug benefits. Will Medicare+Choice

health plans be required to offer the benefit (it is now an option)? If a drug benefit is offered through Medicare, how will the three Medicare Supplement insurance plans currently providing drug benefits be treated? Will pharmacy benefit

management companies (PBMs) be used by Medicare FFS to help administer

the prescription drug benefit for their beneficiaries? What would be the role of

pharmacy benefit management companies in this process? Would they serve as

the administrators of the program or will they take some of the risk for their

role they play in containing costs?

• Will any of the cost of providing the prescription drug coverage be subsidized?—

There is some concern that Medicare beneficiaries below a certain level of income will not be able to afford a prescription drug benefit that is supported by

premium payments and/or co-payments and deductibles. What will be the level

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of government subsidy for those enrollees and who will qualify for that support?

How will Medicaid eligible seniors be covered? • How will co-payments or deductibles be structured?—If you have to pay for something, you will generally take more notice of how much it costs. One important

part of a health benefits design is how much participants are required to pay

‘‘out-of-pocket.’’ If seniors pay for a portion of the cost, they may be more likely

to compare competing drug therapies, including any generic prescription drug

options. • To what extent will drug formularies be permitted?—Formularies are one mechanism that PBMs, insurance companies and managed care plans use to contain

the cost of prescription drugs. There are a number of different ways in which

formularies can be used, but all of them involve creating a list of preferred

medicines whose costs are less than their therapeutic equivalents. Will this

mechanism for containing costs be allowed? If so, what will be the methods for

choosing which drugs are on a formulary? Can different options and plans for

providing coverage have different formularies?

I would like to return to something I said at the start of my testimony regarding

this issue. If Medicare is the vehicle chosen to provide prescription drug coverage

for seniors, then Congress must act on the overall financial issues facing the Medicare program. It may be necessary to cut benefits, raise premiums or increase the

contributions from the federal budget in order to maintain the solvency of the Medicare trust funds. Adding an additional (and potentially costly) benefit to Medicare

will place a further strain on the Medicare program. Congress should not let this

opportunity pass without a serious discussion on how to deal with the long-range

financial solvency of Medicare.

Mr. BILIRAKIS. Thank you very much, Ms. McCall.

Dr. Young?

STATEMENT OF DONALD YOUNG

Mr. YOUNG. Thank you, Mr. Chairman. The Health Insurance

Association of America shares the concerns of many of you in Congress, calling for measures to help seniors better afford prescription

drugs. We stand ready to work with Members of Congress of both

parties and with the administration to help make senior prescription drug coverage a reality for all of our Nation’s seniors.

We believe something can and should be done in the near term

to help seniors, but short-term solutions should not disrupt current

private coverage that seniors depend upon or impede more fundamental Medicare restructuring and reform in the future. Some of

the proposals that have been offered would do much more harm

than good.

Proposals that seek to provide coverage through stand-alone,

drug-only insurance policies simply would not work in practice.

Their proponents have ignored the realities of the insurance market and based their supporting analyses on unrealistic assumptions. Designing a theoretical drug coverage model does not guarantee that private insurers will develop that product or that beneficiaries would purchase it.

Some of the problems include high market entry costs; difficulty

in pricing premiums for a volatile and continuing, ever cost escalating benefit; adverse selection, since drug use is frequently predictable; and significant regulatory hurdles at the Federal and

State levels.

I want to stress also that high deductible products are not a solution. The experience is clear that this is not an approach that is

popular with seniors. Since these are not likely to be accepted by

seniors, they are not likely to be offered by insurers.

Similarly, attempting to assure coverage by mandating that private Medigap plans provide enhanced coverage for pharmaceuticals

149

would result in unsustainable premium increases and reduced coverage. Our analysis indicates that Medigap premiums would jump

by anywhere from 50 to 100 percent as a result of this type of mandate. Remember, Medigap drug coverage plans are available now,

but only 13 percent of those choosing Medigap enroll in such plans,

largely due to their added expense.

In conclusion, any new policy proposal must be carefully examined to ensure that unintended consequences do not erode the private coverage options that beneficiaries rely on today to meet their

health care needs. Survey after survey shows that beneficiaries are

overwhelmingly satisfied with their Medigap coverage. As you consider options to help seniors with ever-escalating drug costs, don’t

destroy the product they rely on for peace of mind and financial

protection. There are other workable solutions.

Thank you.

[The prepared statement of Donald Young follows:]

PREPARED STATEMENT OF DONALD YOUNG, CHIEF OPERATING OFFICER AND MEDICAL

DIRECTOR, HEALTH INSURANCE ASSOCIATION OF AMERICA

INTRODUCTION

Mr. Chairman, distinguished members of the Subcommittee, I am Dr. Donald

Young, Chief Operating Officer and Medical Director of the Health Insurance Association of America (HIAA). Prior to joining HIAA, I served for 14 years as Executive

Director of the Prospective Payment Assessment Commission (PROPAC) where I

was responsible for research, analysis, and the development of recommendations to

the Congress and the Secretary of Health and Human Services on a wide range of

Medicare policies. I also have served as Deputy Director of the Policy Bureau at the

Health Care Financing Administration and as Medical Director for the American

Lung Association. I began my career as a practicing physician in California.

I am very pleased to be here today to speak with you about how best to increase

access to affordable prescription drugs for our nation’s seniors.

SENIORS SHOULD HAVE EXPANDED ACCESS TO NEEDED PHARMACEUTICALS

As we all know, pharmaceuticals have become a critical component of modern

medicine. Prescription drugs play a crucial role in improving the lives and health

of many patients, and new research breakthroughs in the coming years are likely

to bring even greater improvements. With older Americans becoming an ever-increasing percentage of the overall United States population, the need for more medicines for this sector of the population is becoming equally urgent. There is continuing emphasis on new pharmaceuticals to treat diseases typically associated with

aging. Over 600 new medicines to treat or prevent heart disease, stroke, cancer, and

other debilitating diseases are currently under development. Medicines that already

are available have played a central role in helping to cut death rates for chronic

and acute conditions, allowing patients to lead longer, healthier lives. For example,

over the past three decades, the death rate from atherosclerosis has declined 74 percent and deaths from ischemic heart disease have declined 62 percent, both due to

the advent of beta blockers and ACE inhibitors. During this same period, death

rates resulting from emphysema dropped 57 percent due to new treatments involving anti-inflammatories and bronchodilators.

These advances have not come without their price. Rapid cost increases are putting prescription drugs out of reach for many of our nation’s seniors. Because of both

increased utilization and cost, prescription drug spending has outpaced all other

major categories of health spending over the past few years. For example, while hospital and physician services expenditures increased between 3 percent and 5 percent

annually from 1995 through 1999, prescription drug expenditures have increased at

triple the rate, averaging between 10 and 14 percent. According to projections by

the Health Care Financing Administration, prescription drug spending will grow at

nearly 10 percent a year until 2008, almost double the rate of spending on hospital

and physician services.

About two-thirds of seniors have some type of insurance coverage for pharmaceuticals—either through employer-sponsored retiree health plans, private

Medicare+Choice plans, Medicaid or, in limited instances, individual Medicare SupVerDate 11-MAY-2000 13:23 Jul 12, 2000 Jkt 064041 PO 00000 Frm 00153 Fmt 6633 Sfmt 6621 E:\HEARINGS\62971 pfrm07 PsN: 62971
150

plemental (Medigap) policies. But this coverage may be limited, and it is likely to

decline over time as cost pressures mount for employers, insurers, and individual

consumers. For example, recent surveys indicate that employers are contemplating

several changes for their retiree health care plans over the next several years, including increasing premiums and cost-sharing (81 percent of respondents to a 1999

Hewitt Associates survey sponsored by the Kaiser Family Foundation) and cutting

back on prescription drug coverage (40 percent).

Also, unrealistically low government payments to Medicare+Choice plans is having the effect of reducing drug coverage for many seniors enrolled in these plans.

Increases in per capita payments on behalf of beneficiaries enrolled in

Medicare+Choice plans from 1997 to 2003 are projected to be less than half of the

expected increases during the same period for those individuals in the Medicare feefor-service program. In fact, the President’s Fiscal Year 2000 budget included projected five-year medical cost increases of 27 percent for the original Medicare feefor-service program and 50 percent increases for the Federal Employee Health Benefit Program, while Medicare+Choice payment increases during the same period will

be held to less than 10 percent in many counties.

In addition, most seniors live on fixed incomes and their purchasing power will

continue to erode over time as drug expenditures increase more rapidly than their

real income. In terms of current dollars, seniors’ income has increased very little

over the past ten years. From 1989 to 1998, the median income of households with

a family head 65 years of age or older increased from $20,719 to $21, 589. This represents an increase in real income of less than 5 percent over the entire decade.

HIAA shares the concerns of many public voices today calling for measures to

help seniors better afford prescription drugs. We stand ready to work with members

of Congress from both parties, and with the Administration, to help make prescription drug coverage a reality for all of our nation’s seniors.

While we all know that seniors need help, some of the proposals under consideration would fall short of the goal. In addition, the possible effects of any new policy

proposal must be carefully examined to ensure that unintended consequences do not

erode the private coverage options that beneficiaries rely on today to meet their

health care needs. In fact, we are extremely troubled that some of the proposals before Congress would do just that.

Some of the proposals we have examined that rely on ‘‘stand-alone’’ drug-only insurance policies simply would not work in practice; their proponents have, quite

simply, promoted a fiction by ignoring the realities of the insurance market and basing their supporting analyses on unrealistic assumptions. Others have proposed to

assure seniors drug coverage by mandating that private health plans—either

Medigap or Medicare+Choice, or both—provide enhanced coverage for pharmaceuticals. While this option has the virtue of being virtually cost-free from a federal

budgetary standpoint, it would be far from inexpensive for seniors who, according

to our estimates, would experience premium increases for Medigap products of between 50 and 100 percent. It also would result in many seniors dropping the supplemental coverage they depend upon, creating a whole new set of political problems.

My concern about these two policy options can be summed up in two statements:

• First, designing a theoretical drug coverage model through legislative language

does not guarantee that private insurers will develop that product in the market.

• Second, if coverage that consumers cannot afford is mandated, the result will be

unsustainable premium increases, limited choice, and reduced coverage.

It is simply not good policy (or politics) for Congress, as well intentioned as it may

be, to enact legislation that will result in seniors not being able to purchase today’s

extremely popular and very successful Medigap coverage.

HIAA HAS DEVELOPED A SOLUTION TO HELP ALL SENIORS

Before I elaborate on these concerns, let me first make clear that HIAA believes

strongly that the status quo is unacceptable. Last year, HIAA’s Board of Directors

approved a three-pronged proposal developed by our member companies that would

help all seniors. The HIAA program would: (1) help lower-income seniors through

drug assistance programs; (2) provide a tax credit to help offset out-of-pocket drug

costs for all other seniors; and (3) ensure fair payments to private Medicare+Choice

plans that are struggling to provide prescription drug coverage for seniors despite

unrealistically low government payments that will not keep pace with medical inflation and the projected increases in drug costs. I will not discuss the details of

HIAA’s proposal today. We have shared our plan with all members of Congress and

we would be happy to discuss it with you in more detail at any time, or to respond

to questions about it following my formal testimony. Let me just say that the HIAA

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proposal represents an immediate and workable step that will provide meaningful

relief for all seniors, while avoiding the disruption and confusion for beneficiaries

that surely would result were Congress to make changes in seniors’ private benefit

options before addressing needed changes in the underlying Medicare program.

My testimony today will focus primarily on the reasons why we believe that relying entirely on private insurance models as a way to provide drug coverage to seniors is unsound—particularly without significantly restructuring Medicare. First, I

will outline HIAA’s concerns with stand-alone ‘‘drug-only’’ insurance plans for seniors. I will then elaborate on why we so strongly oppose drug coverage mandates

on private insurance products.

WHY A ‘‘DRUG-ONLY’’ BENEFIT IS AN EMPTY PROMISE FOR SENIORS

Some have proposed that most seniors’ drug coverage needs could be met by authorizing the creation of several new private insurance coverage options. Theoretically, these ‘‘drug-only’’ policies would be offered either as stand-alone policies, or

sold in conjunction with existing Medigap coverage.

Developing a legislative prototype based on a set of theoretical constructs does not

guarantee that the market will respond by creating a private insurance product.

Creating a new form of insurance is not easy. As with any new product, start-up

efforts are costly and time-consuming. Adding to the difficulty is that such insurance policies would have to meet existing (and possibly new) state and federal requirements before they could be sold. Thus, before making its entry into the marketplace, a ‘‘drug-only’’ policy would have to clear a multitude of economic and regulatory hurdles. Our members have told us that it is unlikely to do so.

Economic Barriers and Adverse Selection Problems

Insurance carriers attempting to bring this type of product to market would face

many barriers, including the costs of development, marketing, and administration.

Premiums for the policy would have to reflect these costs. Adding to these administrative expenses is the inherent difficulty of developing a sustainable premium

structure for a benefit that is so widely used and for which costs are rising so dramatically.

Volatility in pharmaceutical cost trends also will make a stand-alone ‘‘drug-only’’

policy difficult to price. While there has been relative stability in the rate of increase

of hospital and physician costs during the past two decades, pharmaceutical costs

have been more difficult to predict. In March 1999, for example, HCFA estimated

that prescription drug expenditures would reach $171 billion by 2007. Just six

months later, in September, HCFA was forced to revise these projections and now

predicts that prescription drug spending will reach $223 billion by 2007, a 30 percent increase over the previous estimate. Since the Administration first offered its

Medicare drug benefit proposal just last year, it has had to revise cost estimates

for the program upward by more than 30 percent due largely to greater-than-expected increases in the costs of prescription drugs.

For many reasons, ‘‘drug-only’’ policies would be very expensive to administer.

Adding to the economic liabilities of these policies, therefore, are the expense margin limitations insurance carriers must meet under OBRA ‘‘90, which are likely to

be too small to support separate administration of drug benefits.

The most difficult factor driving up premiums, however, will be ‘‘adverse selection.’’ Adverse selection occurs because those who expect to receive the most in benefits from the policy will purchase it immediately, while those who expect to have

few claims will forgo purchasing it. When people with low drug costs choose not to

enroll in coverage while those with high costs do enroll, insurance carriers are

forced to charge higher premiums to all policyholders. The more opportunities there

are for enrollment, the greater the risk of adverse selection.

Adverse selection would be a very real problem for this type of product. Projections indicate that one-third of seniors (even if all had coverage for outpatient prescription drugs) will have drug costs under $250 in the year 2000, with the average

cost estimated at $68. These seniors are unlikely to purchase any type of private

drug coverage, given that the additional premium for such a policy would be at least

10 times higher than their average annual drug costs. Of the two-thirds who might

buy the coverage, many would be doing little more than dollar trading. Some may

actually end up much worse off: a person with $500 of drug expenses could have

premium, deductible, and coinsurance costs equal to over 200 percent of the actual

costs of drugs. Consequently, many seniors are not likely to purchase the product,

resulting in further premium increases for those that do.

Limiting the sale of these policies to the first six months of Medicare eligibility

would help in theory only, given legislators’ demonstrated proclivity to expand on

‘‘guaranteed issue.’’ The Clinton Administration’s Medicare drug coverage proposal

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seeks to avoid adverse selection by limiting enrollment in a government-provided

drug coverage plan to the first six months when beneficiaries initially become eligible for Medicare. While this type of rule theoretically helps, the concept seldom

works in practice because legislators and regulators expand guaranteed issue opportunities over time in response to political pressure. For example, the ‘‘first time’’

guaranteed issue rule originally in place for Medigap policies has been greatly expanded over time—both through new federal rules in the Balanced Budget Act of

1997 (BBA) and through state law expansions.

Regulatory Hurdles

Even if such insurance policies were economically feasible, they would face significant regulatory barriers. The National Association of Insurance Commissioners

(NAIC) would likely have to develop standards for the new policies; state regulators

would have to approve the products before they could be sold, as well as scrutinize

their initial rates and any proposed rate increases. Even relatively straightforward

product changes based on proven design formulas can take several years to progress

from the design stage through the regulatory approval process and, finally, to market.

Because insurers would be required to renew coverage for all policyholders (as

they are required to do with Medigap products), policies could not be cancelled if

new alternatives were authorized by subsequent legislation or regulations. This

would exacerbate adverse selection problems for these plans, since people with the

greatest drug needs would retain them while others may seek out less costly alternatives. It also would dampen interest in offering the product in the first place, as

insurers would be locked into offering these policies once they were issued.

Guaranteed renewability also would exacerbate pricing problems for these ‘‘drugonly’’ products. While many in Congress have said that they oppose government

price controls for pharmaceuticals, private insurers offering ‘‘drug-only’’ coverage are

sure to face premium price restrictions on their products at the state level (all states

have adopted either rate bands, modified community rating, or full community rating for Medigap as well as medical insurance coverage options available to non-seniors). Even when proposed premium increases are consistent with state law parameters, state regulators are likely to be resistant to the magnitude of increase it

would likely take to sustain a ‘‘drug-only’’ insurance policy as drug prices grow over

time.

If the NAIC did standardize these policies, as some have proposed, it could impose

unworkable limitations on insurers. If insurance carriers were prevented from adjusting co-payments and deductibles as drug costs continue to skyrocket, effective

cost management would not be possible without significant premium increases over

time. On the other hand, allowing needed flexibility would destroy the standardization of Medigap that Congress and the NAIC have worked so hard to achieve during

the past decade.

High-Deductible Options Introduce Additional Practical Limitations

Various suggestions have been made to render these policies economically viable.

One suggestion that flies in the face of historical reality is to design the policies

with very high deductibles—a feature that has never been popular with seniors.

Comprehensive high-deductible Medicare+Choice medical savings account plans authorized under the Balanced Budget Act of 1997 (BBA) are not available because

no company believes it can develop sufficient market size to make it worth the effort. It is also notable that no carrier has attempted to develop or market the two

higher deductible Medigap policies authorized under the BBA, largely out of the

knowledge that this product would not be attractive to a large enough block of seniors to make it viable. The $1,500 deductible in those BBA Medigap policies is considerably lower than some of the deductible levels proposed by advocates of the new

drug-only policies.

In short, a ‘‘drug-only’’ policy is an empty promise: it sounds good but it cannot

succeed in the real world.

A MEDIGAP DRUG MANDATE ALSO IS A BAD IDEA

Another bad idea is mandating drug coverage for Medicare supplemental insurance. (More than 20 million Medicare beneficiaries have such coverage, with 9 million policies purchased individually and 11 million through the group market.)

HIAA is strongly opposed to proposals that would require Medicare supplemental

insurance or Medicare+Choice plans to cover the costs of outpatient prescription

drugs without the addition of prescription drug coverage as a Medicare covered benefit. The growing cost of pharmaceuticals would force plans with mandated drug

coverage to raise premiums or enrollee cost-sharing or reduce other benefits, all of

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which would be counterproductive as seniors dropped their supplemental or

Medicare+Choice coverage. Mandated drug coverage also could lead to overly-restrictive government restrictions on private plans, such as prohibitions on the use of

formularies or mandating certain levels of coinsurance.

Today’s Medigap marketplace is convenient and flexible, offering many choices to

seniors. Of the 10 standard Medigap policies (A through J) sold, three (H, I, and

J) provide varying levels of coverage for outpatient prescription drugs. Only a relatively small number of seniors (about four million) are willing to pay the additional

premiums.

Several studies show that adding a drug benefit to Medigap plans that currently

do not include such coverage would increase premiums dramatically. Seniors who

today have chosen to purchase Medigap policies that do not provide a drug benefit

would end up paying $600 more a year (assuming a $250 deductible for the policy),

according to HIAA estimates.

And if Congress were to require more comprehensive drug coverage, those premiums could double. According to a May 1999 study by HIAA and the Blue Cross

Blue Shield Association, requiring that all Medigap plans include coverage for outpatient prescription drugs would raise Medigap premiums by roughly $1,200 per

year, an increase of over 100 percent.

Premium increases of 50 to 100 percent would result in many seniors dropping

their Medigap coverage, leaving them without protection against the high out-ofpocket costs of the hospital and physician services not covered by Medicare. Moreover, increases of this magnitude would discourage employers (who are also purchasers of supplemental coverage) from offering such a benefit at all.

It is doubtful, then, that requiring all Medigap policies to include a drug benefit

would be popular with seniors—who would experience diminished choice of policies,

higher prices, and in some cases, loss of coverage.

CONCLUSION

The plight of seniors who are struggling to make ends meet and are finding it

difficult to pay for medicine is very real. But the immediacy of the problem should

not lead to short-term fixes that would do much more harm than good. We believe

Congress should step back and examine a broad range of proposals—such as financial support for low-income seniors, tax credits, and fair payments to

Medicare+Choice plans, most of which offer drug benefits. We believe there are

workable solutions that can meet the needs of our seniors without undermining the

coverage they currently rely upon. HIAA stands ready to work with the members

of this Subcommittee, and all in Congress and the Administration, to ensure that

all seniors to have access to affordable prescription drugs.

Mr. BILIRAKIS. Thank you, Dr. Young.

Ms. Alecxih, you heard the comments by Dr. Young, his most recent comments regarding Medigap insurance. Do you agree with

them?

Ms. ALECXIH. In terms of ‘‘don’t mess with Medigap’’?

Mr. BILIRAKIS. In terms of the numbers of seniors or beneficiaries

who have Medigap and the reasons why they don’t carry the

drug——

Ms. ALECXIH. I don’t think there is any direct evidence of reasons

why they don’t carry it. I do know after the 6-month open enrollment period, that there are only like two companies in the Blue

Cross-Blue Shield selected States that don’t use health status as a

screen for whether or not you can gain that coverage at a future

time, you know, after your open enrollment. So I don’t know if it

is just a choice based on premium or if it might also be not being

able to gain access because they are underwritten out.

Mr. BILIRAKIS. All right. Now, Dr. Young mentioned, of course,

the expense involved to seniors in terms of a Medigap policy which

would include drug coverage. Notwithstanding that, if all Medigap

insurance policies included drug coverage or if all seniors who have

Medigap were to use the Medigap policies that include drug coverage, how many more, in terms of percentage, seniors now not

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covered by prescription drug coverage would be covered, would you

say?

Ms. ALECXIH. Well, I think you have an issue——

Mr. BILIRAKIS. How much does that close that gap, in other

words, of 20, 30 percent, whatever it is?

Ms. ALECXIH. About 15—well, about 30 percent of people who

have supplemental coverage get it from Medigap, and probably

about 20 percent of those then have drug coverage, and that is—

you said 13 percent.

Mr. BILIRAKIS. We get 13 percent.

Ms. ALECXIH. You get 13 percent. MCBS gets 42 percent. So pick

a number in the middle for now. So if you say 20 percent of 30 percent, you have got somewhere in the neighborhood of 6 percent, but

that is assuming all of them keep the coverage.

Mr. BILIRAKIS. So if all of them, if all of the Medigap policy holders had policies, Medigap policies that offer prescription drug insurance, you would raise that 69 to 70 percent figure of seniors

who have prescription drug coverage by, what, 6 percent, another

6 percent? Is that what we are saying?

Ms. ALECXIH. Probably, yes, 76, 77, assuming that everybody

who has Medigap continues to have a Medigap policy and that you

haven’t priced them out of the market.

Mr. BILIRAKIS. Yes. Right, right.

Dr. Young, in your written statement you indicated, and I am

just quoting from that written statement, that stand-along, drugonly insurance policies simply would not work in practice, and that

their proponents have promoted a fiction by ignoring the realities

of the insurance market, and of course you expanded upon this

here orally a moment ago. But expand upon that, will you? Explain

your reasoning, why you feel that that is the case.

Mr. YOUNG. If you move to an added benefit, drug benefit, you

are going to increase the cost, and the people that look at that and

say, ‘‘Does that cost more than what my drugs cost out of pocket?’’

and a substantial share are going to say yes. Why should I buy

that? That is more costly to me than my drugs are costly.

Mr. BILIRAKIS. Then what you are saying is that prescription

drug only coverage would not work?

Mr. YOUNG. That is correct. That is absolutely correct.

Mr. BILIRAKIS. Are we saying that the insurance companies

would not offer those policies, they would not be available, or they

would be available but be too expensive to be used?

Mr. YOUNG. It is entirely possible that there would be a small

number of companies that would offer them, and it is possible that

there would be a small number of beneficiaries that would buy

them, but the only people that would buy them are in the high income category group, so that it is not a solution that has any practical value across the great majority of the Medicare population.

Mr. BILIRAKIS. Disagreements? Ms. McCall? Or agreements,

whatever? Do you have any feeling on that.

Ms. MCCALL. To add to a couple of comments, I think some

things to consider, there was a lot of good discussion this morning

about the ultimate goal that we want to achieve and how quickly

we could do things and how perhaps it may need to be phased. But

if the ultimate goal is to integrate a coverage or a set of coverages

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for hospital, physician and ultimately pharmacy coverage, that

moving toward a stand-alone perhaps is not a step in that direction, No. 1; and would that in fact be a universal access type program?

Point No. 2, there may be some unintended consequences. When

you have a more integrated approach with pharmacy and medical,

there are medical directors who will tell you that it is very, very

important to pay for particular drugs that could be very high in

cost, and yet what you gain, you gain for not only quality of care

but for cost somewhere else in the care equation. So how companies

offering drug-only coverage would approach utilization management, it would be fundamentally different in some respects, and

you would have to be careful with that.

Mr. BILIRAKIS. Well, my time is up. Mr. Moran, if you have something real quick.

Mr. MORAN. I just wanted to comment briefly, perhaps, while

agreeing with everyone that comprehensive coverage is obviously a

superior vehicle to deliver these drug benefits, for all the reasons

we have just described, I have a slightly different view, though I

reach some of the same places that Don does on the individual coverage. Perhaps we could come back to that in another question, if

that is timely from your perspective.

Mr. BILIRAKIS. Ms. Alecxih, do you have anything to add to that?

Ms. ALECXIH. No, thank you.

Mr. BILIRAKIS. Thank you. Mr. Waxman?

Mr. WAXMAN. Well, that is an interesting point that you have all

seemed to concur in, that stand-alone policies for drugs only doesn’t

appear to be a viable way for us to go to cover people. Does anybody disagree with that, on this panel? Mr. Moran?

Mr. MORAN. Yes, Mr. Waxman. While not completely disagreeing

with it, from the standpoint that clearly I join my colleagues in

suggesting that comprehensive coverage is superior as a mechanism for delivering a drug benefit, for all the reasons we have described, if comprehensive reform is not in the offing, and the question is not whether or not you are going to go forward with an interim benefit but what form of interim benefit you are going to go

forward with, then the analytical framework might shift a little bit

and you might get a slightly different answer from some of us than

the one you have gotten up until now.

Mr. MORAN. Well, give me an example of a benefit that would be

limited so that it might induce insurers to want to cover prescription drugs?

Mr. MORAN. Let me offer you, without trying to speak for Don

and his industry, a couple of insights. One is that in a purely voluntary market where no one received any degree of financial support for participation, you would have more concern about that

than you would in a market where, as many people are discussing

in a variety of proposals, a substantial number of people, without

regard to their drug health risk, who are going to be offered a fairly substantial degree of subsidies to participate. To the extent that

is in fact the case, you could have a viable private market wrapped

around that degree of participation without too heavy concerns

about the kind of selection effects that people are worried about.

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I think a second area of concern is that if there are expedients

that could dampen the risk faced by insurers through a variety of

mechanisms, public or private, that might also have a mitigating

effect.

And, at the end of the day, I think you have to understand that

the context of some of the insurance industry’s concern is not just

what Washington will do but how a freestanding drug benefit

would play out vis-a-vis the existing State regulatory structures,

because, as you recall, Medigap policies are now price regulated in

virtually every State in the country at the individual market level.

And if I were an insurer valuating a private market, I might be

very concerned that I could go into a Federal scheme that seemed

to be well balanced and reasonable, and then get stuck with totally

unrealistic price regulation at the State level going forward.

So there is a lot of work to do to get to a workable policy, and

I don’t mean to pretend that it is simple, but I am not—I am trying

to maybe offer you an existing proof that it is perhaps not impossible.

Mr. WAXMAN. It sounds like, and I want to hear Dr. Young’s

view, but it sounds like you are saying if it is heavily subsidized,

maybe someone will offer it, if you relieved them of regulatory responsibility at the State level and limited the benefit.

Mr. YOUNG. Thank you, sir. That is a very good summary.

Mr. MORAN. I would probably go, having been invited to talk to

you about the wonders of stop-loss, I would probably have to advocate that in this context, as well. I think you could offer a benefit

in the private market context focused on the highest market cost

drugs without worry about severe selection effect.

Mr. WAXMAN. How would you get any kind of cost containment

under this kind of a scheme? Any of you have any ideas of that?

Mr. YOUNG. In terms of the current Medigap market, while there

is not a lot of people in it, there is the ability to get price discounts.

The Medigap carriers that do write this and the people that do buy

it are pointed toward places where they can buy, mail order

houses, other sites, so they get some price discounts. They don’t

have the care management piece but they do have the pricing discounts.

Mr. WAXMAN. Is that our most efficient way to get the price discounts and to integrate a prescription drug benefit with the other

health care needs? Ms. McCall, you spoke to that point a bit.

Ms. MCCALL. I apologize. Is which way the most efficient way?

Mr. WAXMAN. Well, if you get a Medigap policy that covers prescriptions, which is heavily subsidized but has a limited prescription benefit, now it is going to pay for some drugs, and I asked

whether there can be cost containment. In Dr. Young’s view, he

thinks that there could be cost containment because they are a

larger purchaser, but are we really going to get the benefit of the

maximum cost containment that we could get in a reasonable fashion, and integrate the benefit with other health care services?

Ms. MCCALL. It would be more difficult in that type of design.

I will go back to what my colleagues stated in discussions about

stop-loss. You can have very high stop-loss, but you have to look

at what——

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Mr. WAXMAN. I wasn’t talking about stop-loss. I was just talking

about the benefit itself.

Ms. MCCALL. Correct.

Mr. WAXMAN. Because the fact of the matter is, of all the demographic groups, seniors are charged the highest for prescription

drugs, and this is true because so many seniors don’t benefit from

being a large purchaser with the ability to get discounts on drugs.

So I don’t think the experience has been, Dr. Young has argued

there is some contrary evidence, but I don’t think it has been true

that under the Medigap plans you get a large amount of discounted

drugs. I think most of the time you purchase drugs at retail prices

and the Medigap policy pays for it. Do you think the Medigap approach is going to be a way to get leverage?

Ms. MCCALL. I believe that we can get cost containment through

lower prices through that mechanism. I have much less experience

with Medigap. However, the limited Medigap business that

Humana had, we were able to obtain the on-line adjudication and

the discounts for the enrollees that we did have in our Medigap

policies, so I believe that those mechanisms could be used to obtain

the type of cost containment you are talking about.

Mr. MORAN. I guess if I might, Mr. Waxman, just supplement

that slightly, it really depends, to be direct about answering your

question, on what your standard of efficiency is. If your standard

of efficiency is the lowest unit prices for a particular class of drugs,

then it really depends on the benefit design. I mean, the challenges, most of the benefit designs we have seen brought forward

in this debate are really not insurance; they are just a form of installment financing for whatever purchases people were going to

make anyway.

Mr. WAXMAN. There is not much cost containment in that.

Mr. MORAN. No. Well, certainly heavy front end dollar benefit structures capped at $500 or $1,000 or something like that have actuary values very close to $500 or $1,000. I mean, people are basically buying a sure way of paying for that throughout the year. If

that is your policy, then you can argue whether price controls are

more efficient than competing private markets, that kind of stuff,

but that doesn’t give you a lot of policy traction.

If, on the other hand, your policy is insurance, then trying to create a market that stimulates an environment where people can get

coverage, and I think a private market could actually be a fairly

efficient way of bringing about fairly higher end catastrophic—well,

I guess we weren’t supposed to say the ‘‘c’’ word, were we, Mr.

Chairman?

Mr. WAXMAN. If catastrophic coverage were the goal.

Mr. MORAN. If that were the primary essence of where you were

going, then a private market could be very efficient at bringing you

that.

Mr. WAXMAN. I see my time is up.

Mr. BILIRAKIS. Dr. Ganske?

Mr. GANSKE. Well, Mr. Chairman, I just have to keep going back

to lessons that Congress should have learned from 1988 on this.

Mr. Burr had a series of questions for the previous panel, and I

think this panel was in the room at the time, and it was basically

along the lines that under the administration’s plan, for instance,

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which still costs about $170 billion, a sizable percentage of the

beneficiaries would end up paying more rather than less in their

current situation, because maybe they don’t need that much in

terms of a pharmacy benefit.

This in fact is what happened in 1988. That wasn’t a voluntary

program. That was across the board. And so if you look at the surveys from that time, you found that the senior citizens were about

evenly split. About 50 percent thought that that catastrophic plan

was good, and about 50 percent were vehemently against it because

it raised their premiums, and they also had some means testing in

there, the same thing that, you know, the administration is proposing.

And it goes back to what Mr. Rostenkowski said was, tongue in

cheek, a mistake that they made when Congress designed that program at that time. He said we adopted a principle universally accepted in the private insurance industry: People pay premiums

today for benefits they may receive tomorrow. But the fact is, if you

have a voluntary program and if somebody looks at it and says,

‘‘You know, I don’t need that much right now. I don’t think I’ll get

into paying more premiums right now. I’ll just wait until I get a

little sicker and I need higher premiums,’’ then you have distorted

that risk pool significantly.

So it looks to me like, you know, the administration is trying to

get around the problem that they had in 1988 by saying, ‘‘Well,

now we are just going to be voluntary,’’ but then they come up with

this 80 percent participation that I just can’t see with the way the

numbers are. And it gets us back to, well, if you put enough Federal dollars into this benefit so that the seniors have to pay almost

nothing for this, and you are now just talking about a $10 premium

increase, well, then, yes, then you may be able to get enough participation, and of course the seniors would love that. But that is

why the Clinton administration didn’t design it that way, because

they have already, under the way they have done it, come up with

about a $170 billion plan.

Now, is my analysis correct?

Mr. YOUNG. Your analysis, from the point of view of drug-only

Medigap, is exactly on the mark. That is our point exactly. That

is why a drug-only insurance, private insurance solution is not a

solution at all. It is not going to work. You are right on the mark.

Mr. MORAN. At the risk of sounding like a broken record, I guess

I would say that the critique there is not so much the label you

put on it but the fact that once again the policy you are characterizing is one that is very heavily oriented, with very heavy front end

benefits, with very low caps. In an environment where you are

doing that, all you are doing is taking money out of people’s pockets and then handing it back to them in some different fashion

than what they collected it, and of course you can find a whole variety of circumstances under which some people get more, some

people get less, in often seemingly random fashion, without making

any sense of it.

Mr. GANSKE. Correct me if I am wrong. We have got several actuaries on this panel, and everyone is well versed in what is going

on, but it looks to me like, you know, we have seen some significant

HMO premium increases, not in Medicare but across the board.

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Isn’t a large percentage of that related to the significantly escalating pharmacy benefit cost?

Mr. YOUNG. Absolutely. Drug, pharmacy costs are by far the fastest growing component, 16 percent and in some cases even more

a year, and becoming a substantial part of the overall funding.

Mr. GANSKE. And, Mr. Moran, I think you alluded to the fact

that we have got some drugs coming on line here that could be

hugely expensive. I mean, we are talking about gene therapies. We

are talking about, I believe that we will see in my lifetime a type

of protein breakdown inhibitor that could affect the ends of the

chromosomes, which would be an anti-aging type of medication.

Now, you know, a drug company will have the patent for that. I

think that that is going to be very, very expensive. That could

bump you right into that catastrophic limit, even if it is very high,

if you start out with something at $6,000, $7,000. Is that not right?

Mr. MORAN. I think the point I was trying to make earlier is that

it depends on what your policy concern is. If your policy concern

is in fact about making certain that all Medicare beneficiaries have

access to the highest cost products as they become available on the

market, to the extent they are therapeutically indicated, then you

have to go in the direction of a stop-loss type of policy because no

other type of policy is going to get you there.

Indeed, perhaps the analogy that might resonate is that, let’s

suppose that within 3 years we announced that some biotechnology

company had discovered a cure for Type I diabetes that constituted

a 6-months course of a biological that cost $75,000 a year to manufacture. How long would this subcommittee be able to avoid hearings on that subject, and what would you do with it, if it came

about?

Mr. GANSKE. There you go.

Mr. MORAN. You would either have a stop-loss policy already in

place as a policy response to that eventuality, or you would be authorizing that program in the coming months, in the same way

that you have authorized programs for the treatment of end stage

renal disease and other areas where there were definitive, kind of

‘‘nail it’’ treatments brought forward, regardless of the price.

So, I mean, to me that is the challenge in all of these issues, is

on the one hand we can say that we are dealing with this from the

context of the existing structure of drug benefit programs and we

know what to do, but the policy challenge is right over the horizon

looking at us.

Mr. BILIRAKIS. The gentleman’s time has expired.

Mr. GANSKE. Thank you, Mr. Chairman.

Mr. BILIRAKIS. Mr. Barrett?

Mr. BARRETT. Thank you, Mr. Chairman. I apologize for not

being here for the testimony, so my questions might not particularly be on the mark or might seem naive, but the first comment

and question I have is, one of the parts of the debate that we hear,

one of the points we hear with regard to trying to control the cost

of prescription drugs is, whether it is with a market type of approach, or some would argue that it is price controls, is it would

inhibit innovation, it would inhibit any type of explorations.

Do you find that the current laws with regard to Medicare, because Medicare obviously covers virtually everything except preVerDate 11-MAY-2000 13:23 Jul 12, 2000 Jkt 064041 PO 00000 Frm 00163 Fmt 6633 Sfmt 6602 E:\HEARINGS\62971 pfrm07 PsN: 62971
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scription drugs, have they in any way inhibited research or innovation in other areas of health care? And just go down the line, just

to get your opinion on that.

Mr. YOUNG. That would be a very difficult question to answer definitively, as that is a cause and an effect. I don’t have any information that says that there is evidence that you have impeded innovation. I think you can argue in a number of cases that Medicare’s payment policies have in fact provided fuel that has fostered

some innovation, by putting more money in the health care system

overall, but I am not sure how anyone would ever draw the conclusion with any degree of certainty that you are asking.

Ms. ALECXIH. I think the set-asides within Medicare and the hospital PPS payment system for teaching hospitals, in and of itself,

encourages innovation because that is where a lot of that stuff is

going to occur on the medical procedure side. And so I don’t—that

is all I would have to offer on that point.

Mr. MORAN. I mean, in the intermediate and the longer term it

is possible to take all kinds of different views about this. I guess

my thinking on this is colored heavily by the fact that if you look

out across the existing landscape, a lot of the really cutting edge

stuff is being done now by smaller biotech companies rather than

by large pharma companies, and virtually all of those are that the

point—they are in a premarketing stage. They basically have no

revenues, and they are 100 percent dependent on venture capital

in order to finance the next 6 to 9 months of operation.

And I guess a concern I have is at some point, if you were to

come forward with a serious prospect that there might be some active price intervention from Congress’ standpoint, the venture capital would dry up for a large chunk of that, and if venture capital

dries up for a large chunk of it, they don’t make it through the

year.

Mr. BARRETT. But have you seen any evidence of venture capital

drying up for any other segment of the health care industry?

Mr. MORAN. I think you would have a difficult time financing

any subacute fields this month, frankly. Yes, venture capital dries

up in every area of health care where it turns out not to be a good

idea on a retrospective basis. And so, I mean, that is the challenge

in all of this.

Mr. BARRETT. Ms. McCall?

Ms. MCCALL. I guess to add onto what Mr. Moran has just said,

I have had the opportunity to negotiate with a number of manufacturers and have had to pay a lot of attention to formulary design,

and I understand the challenges that pharma faces in terms of—

not that I always like them, but I understand the challenges they

face in terms of how long they have for a drug to be on market.

Mr. BARRETT. That is no my question.

Ms. MCCALL. I understand.

Mr. BARRETT. My question is other areas of health care. I understand the argument that it is tabu, that we should never, ever

mention any type of government intervention with——

Ms. MCCALL. Sure. I do believe——

Mr. BARRETT. [continuing] with prescriptions, but it blows my

mind when I see the commercials that say do you want government

involved in your health care, and I am thinking the only part—

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talking to seniors, the only part that government is not involved in

is prescription drugs, and everybody is happy with everything but

that. So I am wondering what evidence there is that somehow government has screwed up innovation in other areas of health care

because government is involved.

Ms. MCCALL. The only evidence that I would see, and I don’t

think it is screwed up, is again in the subacute area where the

issue is one of financing. Are we trying to actually finance something below the cost that it takes to deliver something? Once you

reach that point and everybody recognizes it, there will not be an

injection of capital into those areas.

But I also believe that what is happening in the drug development area is so unlike what is happening in other areas of technological development, that it is at least different in degree, if not different in kind, in the types of development taking place.

Mr. BARRETT. Have any of you looked at the Tom Allen bill? I

know that it is something that—and I was frankly a little disappointed when I looked at the committee memorandum and the

different models for reform. It listed—I didn’t see any mention at

all of the Tom Allen bill, and I am just interested in your comments on that bill.

Mr. MORAN. The superficial policy is what it is. It states an intention to try to go toward what amounts to a unitary pricing

structure or a voluntary—I mean, the challenge, whether or not

you believe that as a matter of policy is a matter of taste, in my

judgment. The question really is as to the administrative workability of it, and I guess my experience in these kind of things is,

you won’t know until you try it, and once you have tried it, you will

find it is a lot more complex than you think it is.

Mr. YOUNG. The information that was presented by Mr. Greenwood I think showed price versus other factors driving up costs,

and that price was a component but there were multiple other factors that were driving up drug spending costs, including utilization,

mix of services, and things that were used. And so I think you have

to be careful if you are focusing only on price, No. 1. And, No. 2,

we have had a number of experiments in this country on price controls, and they generally have not worked well.

Mr. BARRETT. I am sorry. Do you believe that the Allen bill is

price controls, I guess was my question.

Mr. YOUNG. Okay. Then we get into a matter of semantics. I

don’t know what kinds of words you want to use, but you are interfering with an exchange or you are intruding into an economic exchange, whether you want to talk about it as price controls or how

you do it.

And we do know, as one of the witnesses mentioned earlier, that

the Medicaid system, whether you call that price controls, led to a

change in the market. There is an action and a reaction to it. So

I think you need to be very careful when you start getting involved

in market transactions and rules and regulations.

Mr. BARRETT. One final question, just as a follow-up to that. I

am of the belief that under the current system, that older people

pay more because disproportionately they are not covered by health

care plans. And Ms. McCall made reference earlier to unintended

consequences. I guess my first question is, do you agree with my

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factual assertion that older people by and large are paying more?

And, second, is that an intended consequence or an unintended

consequence?

Mr. BILIRAKIS. Brief responses, please.

Mr. YOUNG. It is a consequence of younger people tending to

have insurance, and they buy insurance through the workplace and

they are in some form of pharmacy benefit management, drug pricing. So they are getting a discount, and the seniors, the evidence

seems to be overall, are paying more than those who are getting

a discount through a large group.

Mr. BARRETT. So, is that an intended consequence or an unintended consequence of the current system?

Mr. YOUNG. No, I think that is an unintended consequence. I

think the consequence was to give those who are negotiating in

plans, and the plans moved forward, to get the discounts.

Mr. BARRETT. Okay. And I would yield back. My only, if I

may——

Mr. BILIRAKIS. You are well past your 5 minutes.

Mr. BARRETT. The fear of moving into these new systems is that

there is unintended consequences. My point is, under the current

system, as you have said, Dr. Young, there is an unintended consequence that I think hurts older people. And I would yield back

the balance of my time.

Mr. YOUNG. If I could just add to it, there is a residual, and

maybe we are getting into semantics about an unintended consequence or a residual effect. The fact that the seniors are playing

may be a residual effect and not an unintended consequence.

Mr. BILIRAKIS. Dr. Ganske, did you have anything further, another minute or 2? You are more than welcome.

Mr. GANSKE. No, thank you.

Mr. BILIRAKIS. I have shocked you, haven’t I?

Well, you have waited for so very long, and we certainly appreciate it. By now, some of you have done this before and you know

what it is like being on that third panel, which is always a terrible

panel to be on. But we appreciate it so much.

Now, there may be and quite often are questions from the members of the subcommittee staffs to you in writing, and I know you

don’t mind receiving those and responding to them, if you would.

If there isn’t anything further to come before this subcommittee, we

will go ahead and adjourn and release you, and thank you again.

[Whereupon, at 3:19 p.m., the subcommittee was adjourned.]